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Pound Euro Exchange Rate News: GBP/EUR Plummets as UK Inflation Creeps Up to 9.1%

June 22, 2022 - Written by John Cameron

Pound (GBP) Drops Sharply as Inflation Hits New 40 Year Highs

The Pound (GBP) took a nosedive today as soaring living costs and record high petrol prices fuel inflation propelling the UK’s consumer price index to its highest level since 1982.

The CPI figures printed at 9.1% up from last month’s 9%. The latest rise in inflation exacerbates the UK’s cost-of-living crisis.

The soaring prices of petrol and diesel were a key driver of inflation in May, with a 32.8% jump in fuel costs in the past year, the largest annual increase since records began in 1989. Food and non-alcoholic prices are also soaring at the fastest rate since 2009.

With the Bank of England (BoE) warning that inflation could hit double figures within months, the economic outlook for the UK looks increasingly bleak, with GBP investors fearing the consumers will continue to rein in their spending as prices soar.

However, at the same time, the latest rise in inflation is more modest than some GBP investors had hoped. This is also weighing on the Pound as it undermines BoE rate hike bets.

Paul Dales, chief UK economist at Capital Economics, said:

‘It is not obvious in this release that there are signs of the ‘more persistent inflationary pressures’ that last week the Bank said would prompt it to ‘act forcefully’.

‘On its own, then, this release is probably not enough to seal the deal on a 50bps interest rate hike in August.’

Elsewhere, the UK is hit by the biggest rail strike in 30 years as railway workers demand a pay rise to keep up with inflation. Unions are arguing that it is companies hiking their prices who are responsible for soaring inflation.

Boris Johnson has since warned workers against asking for pay rises in order to prevent a ‘wage-price spiral’ that could lead to further inflation. This comes as a report has been published that claims Brexit has made the cost-of-living crisis worse. The Resolution Foundation claims that Brexit is damaging the competitiveness of UK exports globally:

‘A less open Great Britain is expected to be poorer and less productive.’

As inflationary pressures continue, and Brexit troubles persist, the Pound could encounter further headwinds going forward.

Euro (EUR) Firms amid Risk-Averse Sentiment

The Euro (EUR) is strengthening today amid a shift in market sentiment. With fears growing of a global recession looming ever closer amid the tightening cycles of the central banks, a risk-averse market has emerged, buoying the appeal of the single currency.

Lending some support to the Euro was comment from the European Central Bank (ECB) Governing Council member Olli Rehn. In a speech yesterday, Rehn claims that it is very likely that the central bank will be hiking its policy rates in September by more than 25bps.

However, a stark warning from the International Energy Agency (IEA) could pile pressure on the Euro in the coming months. The IEA Chief Fatih Birol has called on European governments to prepare for a total shutdown of Russian gas exports this winter:

‘Europe should be ready in case Russian gas is completely cut off. The nearer we are coming to winter, the more we understand Russia’s intentions.

‘I believe the cuts are geared towards avoiding Europe filling storage and increasing Russia’s leverage in the winter months.

‘Emergency measures taken by European countries this week to reduce gas demand, such as firing up old coal-fired power stations, were justified by the scale of the crisis despite concerns about rising carbon emissions.’

GBP/EUR Exchange Rate Forecast: Hawkish BoE to Inspire the Pound?

Looking ahead, data is thin on the ground for Pound Euro as markets continue to digest the UK inflation figures. With inflation edging up, and with no signs of slowing, a hawkish turn by the BoE could provide moderate relief for the Pound.

Elsewhere, the Euro area consumer confidence flash data is due to print this afternoon. An expected drop in confidence could hamper the Euro as inflationary pressures continue to weigh on the economy.

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