Pound Euro Exchange Rate News: GBP/EUR Muted amid Falling UK Inflation

December 14, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Muted amid Falling UK Inflation

GBP/EUR Exchange Rate Rangebound as UK’s Inflation eases

The Pound to Euro (GBP/EUR) exchange rate was sluggish on Wednesday, as data showed UK inflation fell for the first time in three months.

At the time of writing the GBP/EUR exchange rate traded at around €1.1623, which is virtually unchanged from Wednesday’s opening rate.

Pound (GBP) Steady as UK Inflation Cools

The Pound (GBP) was rangebound on Wednesday, as GBP investors reacted to the UK’s latest consumer price index.

Data published by the Office for National Statistics (ONS) reported headline inflation rate fell from 11.1% to 10.7% in November. Consensus estimates forecast a fall to 10.9%.

Despite the weaker-than-expected reading, economists warned inflation remains high and that the cost-of-living crisis will continue to deepen in 2023. This is due to prices climbing faster than the rate of real wages.

Senior Economist at the Resolution Foundation, Jack Leslie said:


‘[W]ith price rises still massively outstripping pay rises – and Britain’s poorest families facing an inflation rate of over 12 per cent – families are still getting poorer month-on-month, and the cost-of-living crisis will continue to deepen in 2023.’

Elsewhere the surprisingly sharp slowdown in inflation is raising questions over future interest rate hikes from the Bank of England (BoE).

While the drop in inflation suggests the BoE’s current tightening cycle is beginning to have an impact, it's clear the bank still has a long way to go to bring price growth back down to its 2-3% target range.

Euro (EUR) Mixed amid Plunge in Industrial Production

The Euro (EUR) traded in a broad range on Wednesday. A sharper-than-expected fall in industrial production likely dented Euro sentiment.

Whilst industrial production traditionally has a limited impact on the Euro, a the sharp plunge in factory output proved particularly worrying for EUR investors.

Industrial production was expected to fall from a downwardly revised 0.8% to -1.5% in October. However, it fell to -2%. The drop was largely attributed to decrease in energy production, which slipped for the second consecutive month.


However, it’s possible the Euro’s losses were limited somewhat by positive news from Germany. According to a statement from the Ifo economic institute on Wednesday, Germany’s recession is expected to be a shallow one.

The Ifo had previously forecast that the German economy would contract by 0.3% in 2023. However, their revised forecast has lowered that expectation to 0.1%.

Ifo’s Head of Forecasts, Timo Wollmershaeuser said on Wednesday:

‘In the two quarters of the winter half-year 2022/23, the gross domestic product shrinks, but then it goes up again’.

This news has made EUR investors hopeful. Being the Eurozone’s biggest economy, if Germany’s recession is milder, it’s hoped that the EU’s recession will be shallower too.

This, coupled with the Euro’s negative correlation with the US Dollar (USD) managed to cushion the single currency from major losses on Wednesday.

GBP/EUR Exchange Rate Forecast: GBP to Firm on BoE Reassurance?

Looking ahead, the Pound Euro exchange rate could be driven by the Bank of England’s (BoE) interest rate decision on Thursday.

GBP investors have priced in a 50bps hike leaving the focus on the bank’s forward guidance.

Investors will be looking to the BoE to shed some light on its 2023 policy plans. If the BoE policymaker reiterate their desire to keep hiking rates, GBP could strengthen.

Turning to the Euro, the European Central Bank (ECB) is also due to raise interest rates on Thursday. A 50bps hike has been priced in by investors. If comments made by the ECB reinforce further dovish hikes, the Euro could be dented.

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TAGS: Pound Euro Forecasts