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Pound Euro Exchange Rate Ticks Lower as UK Food Inflation Hits 13-Year High

June 21, 2022 - Written by John Cameron

Pound Euro (GBP/EUR) Exchange Rate Edges Lower amid Hawkish ECB

The Pound Euro (GBP/EUR) exchange rate is trending lower today. A downturn to UK manufacturing growth may be limiting gains for the currency pair, although expectations of further Bank of England (BoE) rate hikes could be underpinning the exchange rate. Additionally, hawkish comments from European Central Bank (ECB) policymakers could also be pulling GBP/EUR lower.

At time of writing the GBP/EUR exchange rate is at around €1.162, which is roughly -0.2% lower than this morning’s figures.

Pound (GBP) Trends Higher as Grocery Inflation Increases BoE Rate Hike Bets

The Pound (GBP) is edging higher some of its rivals today amid optimistic comments from BoE officials. High food price inflation may also be increasing bets on Sterling amid hope of future rate hikes.

Figures released today showed grocery price inflation reaching a 13-year high of 8.3%, its highest rate in 13 years. The impact of the rise on household costs could limit gains for Sterling amid growth concerns.

On the other hand, the high inflation figures are potentially increasing bets on the currency amid expectations of further rate hikes from the central bank.

Comments from BoE policymakers are potentially reinforcing bets on Sterling today. Speaking today, the central bank’s chief economist Huw Pill said:

‘We will do what we need to do to get inflation back to target. And at least in my view, that will require further tightening of monetary policy over the coming months.’

Gains for the Pound could be limited by a growth slowdown in the country’s manufacturing sector. The Pound could also see uncertainty today amid widespread strikes in the UK rail sector.

Euro (EUR) Climbs amid USD Weakness

The Euro (EUR) is making solid gains against many of its competitors today. Weakness in the US Dollar (USD) is underpinning the single currency, as well as hawkish comments from multiple ECB officials and European bank policymakers.

Speaking today, Finnish Governing Council member Olli Rehn said:

With inflation rising sharply, there has been good reason to expedite the normalisation of monetary policy.’

ECB Governing Council member Olli Rehn gave further concrete signals of the ECB’s future actions on Tuesday. Rehn stated that was ‘very likely’ that the central bank’s September rate hike would be greater than 0.25%. Supporting this, ECB policymaker Francois de Villeroy stated on Monday that there were ‘no limits’ on the central bank’s commitment to ensuring price stability in the Eurozone.

These comments come after ECB President Christine Lagarde’s hawkish comments on Monday. Lagarde made clear that a September rate hike of at least 25 basis points was coming, and that the central bank would act to prevent underlying price rises from continuing.

GBP/EUR Exchange Rate Forecast: Will UK Inflation Push BoE to Act?

Looking to the rest of the week for the Pound, inflation rate figures on Wednesday may push the currency higher. Investors are likely to place further bets on the currency amid expectations of further rate hikes from the BoE.

On the other hand, gains for the Pound could be limited throughout the week amid growth concerns. Thursday’s forecast drop to private sector growth is the first data release that could contribute to this fear if PMI figures print as forecast. Also on Thursday, a drop to distributive trades figures may weigh on GBP.

Friday’s retail sales could also dent confidence in the Pound and the UK’s long-term economic prospects. May’s figures are forecast to fall to -0.9%.

For the Euro, Wednesday’s non-monetary policy meeting could provide some impetus for the single currency.

Thursday’s fall to PMI figures for Germany and the Eurozone could pull EUR lower if they print as forecast. The impact of inflation on the bloc’s private sectors could cap major losses however if investors see it as cause for action from the ECB.

Finally, a drop to German business confidence could also see the Euro slip lower.

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