Pound (GBP) Confidence Faltered on Rising UK Inflation
Although expectations had been for UK inflation to have strengthened moderately in September investors were still surprised to find a rise from 0.6% to 1.0% on the year. This naturally prompted fresh weakness for the Pound (GBP), exacerbating concerns over the negative impact that the Brexit vote has had on the domestic economy. With the sharp weakening of Sterling still to filter properly through, with retailers having largely absorbed the fall to date, it seems likely that inflation will overshoot the Bank of England’s (BoE) 2% target in the near future.
Moreover, as researchers at RBC Capital Markets noted:
‘With the BoE likely to look through a transitory acceleration in inflation, the main effect will be to squeeze households’ real income as prices rise more quickly than wages, crimping consumer spending.’
This upside surprise only had a limited impact on the Pound to Euro (GBP EUR) exchange rate, though, largely thanks to the relative softness of the single currency. With fresh domestic data thin on Tuesday the Euro has lacked anything in the way of particular support.
GBP EUR Exchange Rate Forecast: Less Dovish ECB Predicted to Boost Euro Demand
The appeal of the single currency is expected to remain a little muted ahead of Thursday’s European Central Bank (ECB) policy meeting. Although there is no expectation for any major developments to occur at this juncture, markets are still likely to be sensitive to the latest signs of policymaker sentiment. If the ECB continues to demonstrate a less dovish outlook then speculation of a potential tapering to its quantitative easing program could pick up once again. This could see the Euro boosted higher, although any signs of hesitance are likely to temper demand for the common currency.
Wednesday’s raft of UK employment data, meanwhile, could diminish the strength of the Pound further. Should unemployment be found to have risen in the wake of the Brexit vote then the BoE could be prompted to consider further monetary loosening, a prospect that investors are unlikely to view with enthusiasm. Of particular note will be the latest wage data, with a combination of higher inflation and static wage growth set to weaken the GBP EUR exchange rate further.
Current Interbank Exchange Rates
At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending higher at 1.11, while the Euro to Pound (EUR GBP) pairing was slumped around 0.89.
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