The Pound Sterling to Euro (GBP/EUR) exchange rate rallied after Bank of England Governor Mark Carney hinted that UK interest rates could rise sooner than the markets expect despite inflation being set to fall further over the coming months.
Carney added that UK take-home pay is going to grow at its fastest pace in a decade, thanks to lower inflation.
Earlier the Pound Sterling to Euro exchange rate softened on Thursday after emergency talks on the Greek crisis ended without an agreement, both sides did however say that there was still hope that a deal could be reached.
The GBP/EUR exchange rate hit a session low of 1.343
Seven hours of talks in Brussels ended with European Finance Ministers unable to reach a compromise and unable to deliver a joint statement on the next steps in the negotiating process. Despite that, both sides denied that there had been a disagreement.
‘We had an intense discussion, constructive, covering a lot of ground, also making progress, but not enough progress yet to come to joint conclusions. We did not actually go into detailed proposals, we did not enter into negotiations on content of the programme or a programme, and we simply tried to work next steps over the next couple of days. We were unable to do that,’ said Jeroen Dijsselbloem, the chairperson of the Eurogroup finance ministers.
Despite signs that the talks had been a failure, the Euro found support from other reports that suggested that some progress had been made.
‘We understand each other much, much better now than we did this morning. Europe manages to find agreements even if it’s at the last moment,’ said Greek Finance Minister Yanis Varoufakis after the meeting.
A deal needs to be reached before the end of the month or Greece will default on its international debt payments and go bust. Optimism that a deal will be reached supported the single currency against the Pound, US Dollar and other major peers.
Traders widely shrugged off data released in Germany, which showed that inflation in Europe’s largest economy fell into negative territory for the first time in five years in January. According to Destatis, the annual rate of inflation in the nation stood at -0.4% last month. On a month on month basis inflation fell by -1.1%.
The Euro also found support after news broke that a ceasefire for Ukraine will come into effect on February 15.
UK Data in Focus
The Pound Sterling exchange rate could weaken further if the upcoming Bank of England Inflation report shows that the UK is heading for a period of negative inflation over the coming months.
‘The bank’s new report may be the first to show a central projection for inflation that is, in some quarters, negative. It could be the BoE’s first deflation report,’ said Simon Wells, chief UK economist at HSBC.
