The Pound Euro exchange rate nosedived this week, after GBP investors were shocked by a larger-than-expected fall in UK inflation.
Pound tumbles as inflation slowdown weakens BoE rate hike bets
The Pound Euro exchange rate was left to trade in a narrow range at the start of this week. Both Sterling and the single currency struggled to find any strong direction amid a lack of notable UK and Eurozone data.
EUR exchange rates then began to strengthen on Tuesday, with the Euro being bolstered by its negative correlation with the US Dollar, as the latter slumped to multi-month lows.
Wednesday then triggered a dramatic plunge in the Pound, in response to the UK’s consumer price index. June’s CPI figures showed headline inflation decelerated from 8.7% to 7.9%, while core inflation unexpectedly cooled to 6.9%.
The softer-than-expected inflation figures saw GBP investors hastily reprice expectations for a 50bps rate hike from the Bank of England (BoE) in August and sent Sterling plummeting as analysts began to predict UK interest rates will no longer peak above 6%.
At the same time, the Euro was supported by an upwards revision to Eurozone core inflation in June as it bolstered European Central Bank (ECB) rate hike bets.
The end of the week then saw the Pound recoup some of its losses after the UK reported a surprisingly strong uptick in domestic retail sales last month.
ECB rate decision in the spotlight
Looking ahead, the main catalyst of movement in the GBP/EUR exchange rate next week will undoubtedly be the ECB interest rate decision.
The ECB is widely expected to deliver another rate hike following its July meeting, with EUR investors having priced in an additional 25bps increase.
However, there are some questions regarding the bank’s appetite for further hikes amid a sustained fall in Eurozone inflation. If the bank signals its hiking cycle has run its course, the Euro is likely to slump.
Ahead of the ECB’s rate decision EUR exchange rates may be influenced by the Eurozone’s latest PMI figures. Expect to see the Euro get off to a rough start if growth in the bloc’s private sector continued to contract this month.
The UK will also publish its own PMIs on Monday. Could a more resilient performance by the UK’s private sector help the Pound to claw back some of its recent losses?
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