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Pound Euro Exchange Rate Rangebound as EU Inflation Hits Record High

June 17, 2022 - Written by John Cameron

Pound Euro (GBP/EUR) Exchange Rate Trends Sideways as Recession Fears Grow

The Pound Euro (GBP/EUR) exchange rate is trading narrowly today. A poor outlook for the UK’s economy is likely weighing upon the currency pair today, as well as an underwhelming rate hike from the Bank of England(BoE) on Thursday. A risk-off trading sentiment is also likely limiting gains for the exchange rate.

At time of writing the GBP/EUR exchange rate is at around €1.1700, virtually unchanged from this morning’s opening figures.

Euro (EUR) Gains as Record-High Inflation Increases ECB Bets

The Euro (EUR) is making some gains against its riskier competitors today amid a risk-off market mood. Some demand for the single currency may be being sapped by a strong US Dollar (USD), however.

The single currency could be seeing gains owing to expectations of further rate hikes from European Central Bank (ECB). The final reading of May’s Eurozone inflation rate printed at a record 8.1% today, bolstering investors’ beliefs that the ECB may need to act aggressively to tame inflation.

Additionally, comments from ECB policymaker Klaas Knot may also be providing support to the single currency today. Speaking in an interview today, Klaas signalled that 0.5% rate hikes may be needed to bring inflation back to the central bank’s target rate.

Klaas also stated that it was ‘impossible’ to tie down a percentage the ECB would need to hike rates by.

Finally, news that the EU is set to back Ukraine’s bid for membership could be helping to bolster EUR.

Pound (GBP) Drops amid Poor UK Outlook

The Pound (GBP) is falling against the majority of its rivals today. A retreat to global risk appetite could be weighing on the currency. Bets on Sterling are also remaining limited after the Bank of England’s (BoE) interest rate decision yesterday underwhelmed investors.

The central bank rose interest rates by 0.25% on Thursday which saw the currency fall in the immediate aftermath. Investors had been expecting for a more aggressive rate hike from the BoE to curb soaring inflation.

The Bank of England did provide help to restore some confidence however as it signalled that it would be ready to take more hawkish action in the future. This forward guidance may also be helping to limit major losses for the Pound today.

In a statement following the announcement the BoE said:

The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.’

The central bank’s outlook could be denting confidence in the currency today, however. The BoE is predicting that the rate of inflation could go as high as 11% in autumn 2022 due to further rises in energy costs. Economists have predicted that soaring inflation is likely to push the UK into an early recession.

GBP/EUR Exchange Rate Forecast: Will UK Inflation Prompt Further BoE Action?

Looking to the coming week for Sterling, inflation figures for May on Wednesday may have a mixed impact on the currency. The predicted high rate could increase fears of a recession in the UK and pull GBP lower. The Pound could be pushed higher however if bets on more aggressive action from the BoE increase.

PMI data for the UK’s manufacturing and services sectors on Thursday could see the currency slump if private sector growth drops for the third consecutive month. Additionally, a forecast slump to May’s retail sales on Friday could also see the Pound fall further.

For the Euro, German PPI figures on Monday could see the Euro drop if the forecast fall is taken as a sign of easing inflationary pressures. A predicted dip to Eurozone and German private sector PMIs could also pull the single currency lower.

Finally, a drop to German business optimism on Friday could also limit gains for the Euro.

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