Pound Euro Exchange Rate News: GBP/EUR Wavered as UK Inflation Eased to 10.5%

January 18, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Wavered as UK Inflation Eased to 10.5%

Pound (GBP) Supported by Further Interest Rate Hikes

The Pound (GBP) enjoyed mixed success on Wednesday in the wake of a second straight month of softening inflation. Headline CPI fell to 10.5%, meeting expectations and only slipping modestly from November’s 10.7%. Despite easing, inflation in the UK remains close to 40-year highs, bolstering further rate hike expectations from the Bank of England (BoE).

Contributing the biggest downward pressure on inflation was declining fuel prices. Both petrol and diesel fell as the former dropped on average by 8.3p per litre. However, the continually soaring cost of food and non-alcoholic beverages ensured the headline rate didn’t fall further. A 16.8% increase YoY was the biggest jump since 1977.

Meanwhile, services prices also crept up higher, with higher energy and wages costs climbed to its highest level since March 1992, a jump of 6.8%. But policymakers are concerned with the tight jobs market exerting further pressure on inflation. This in turn, could lift the Pound further on increased rate hike bets. HSBC Senior Economist Liz Martin commented:

‘The lower overall (inflation) rate may reduce the risk of a wage-price spiral, but these figures suggest the BoE's job is not yet done.’

Euro (EUR) Buoyed by Hawkish ECB Stance

Meanwhile, the Euro (EUR) also enjoyed increased rate hike expectations as final inflation reading was confirmed at 9.2% for the month of December. With levels still close to the all-time high of 10.6%, and far above the European Central Bank’s (ECB) target rate of 2%, further rate hikes are expected.

Speaking at the World Economic Forum in Davos, ECB Governor Francois Villeroy de Galhau has reiterated the central bank’s goal of bringing inflation down. Villeroy appeared both hawkish and optimistic in his comments as he concedes that despite inflation softening, the ECB must ‘stay the course’ and fight inflation. He was also optimistic about avoiding a recession, he added:


‘If I look at the situation from Europe - it’s probably the same in the U.S., more or less - activity is more resilient than expected, and we should avoid a recession this year, which I wouldn't have (expected) three months ago.’
The ECB has raised interest rates by 250bps since July and is expected to raise them again by 50bps at the next policy meeting in February.

GBP/EUR Exchange Rate Forecast: Domestic Issues to Influence the Pairing?

Looking ahead, the Pound Euro exchange rate could see further movement amid a lack of major economic data. The current wave of optimism lifting Sterling could come to an abrupt end if domestic headwinds return. Ongoing industrial action and the persistent cost-of-living crisis could weigh heavily for Sterling.

Meanwhile, any developments in Ukraine could influence the Euro. Also, with the WEF in full swing, comments from various policymakers and politicians could see global market sentiment shift.

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TAGS: Pound Euro Forecasts