Demand for the Pound (GBP) surged after February’s UK consumer price index report surprised to the upside.
Investors had anticipated a solid uptick of 2.1% on the year, leading to increased bullishness when the measure instead printed at 2.3%.
This stronger showing raised hopes that the Bank of England (BoE) could be encouraged to consider a more hawkish outlook.
While inflation is now back within the BoE’s target range, however, the prospect of an imminent return to monetary tightening seems slim.
Even so, as investors piled back into Sterling the GBP EUR exchange rate trended higher.
Markets were also encouraged by the fact that public sector net borrowing had decreased further than forecast, falling to 1.08 billion in February.
A lower level of government borrowing bodes well for the health of the wider economy, particularly ahead of the uncertainty of Brexit negotiations.
Despite its boost to the Pound, though, the latest inflation data is not entirely positive.
James Smith, economist at ING, noted:
‘Whilst this surge in inflation may raise a few eyebrows on the MPC, it’s what this means for consumers that really counts. At 2.3% YoY, wages (ex. bonuses) are now growing at the same rate as inflation. With rising food and fuel prices set to push inflation above 3% by the end of the year, 2017 looks set to be an increasingly tough year for households.’
As inflation has now risen above wage growth consumer spending looks likely to weaken in the coming months.
Given that much of the economy’s recent resilience has been thanks to persistent consumer confidence this strength could soon begin to falter.
UK retail sales are forecast to have picked up in February, however, which could help the GBP EUR exchange rate extend its recent gains in the short term.
In spite of a lack of fresh domestic data demand for the Euro picked up on Tuesday morning.
The first televised debate in the French presidential election helped to buoy confidence in the single currency, with far-right candidate Marine Le Pen not seeing a particular advance in the polls.
Markets are increasingly optimistic that the populist domino effect has been halted, although the prospect of another upset remains.
There is also a relatively positive mood towards Greece, with talks between Athens and its creditors intensifying in the hopes of a final breakthrough.
However, if talks fail to show significant signs of progress the ongoing lack of conclusion to the bailout review could weigh on the Euro once again.
Volatility could be in store for the GBP EUR exchange rate once the European Central Bank (ECB) releases its latest economic bulletin.
If the central bank continues to talk down the possibility of an imminent return to tighter monetary policy the appeal of the Euro could weaken.
On the other hand, if the tone of the bulletin proves to be more optimistic then the single currency could find further support.
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