The Pound Euro exchange rate slumped to three-week low this week, following the publication of the UK’s latest inflation figures. 

Pound nosedives on weaker-than-expected inflation 

The Pound Euro exchange rate got off to a poor start this week. While the Euro was bolstered by a series of hawkish speeches from European Central Bank (ECB) policymakers. Sterling was undermined by a bleak UK economic forecast from accountancy giant KPMG. 

Tuesday saw GBP/EUR recoup some losses as a risk-on market mood helped to underpin the Pound. While the single currency was dented by confirmation of a sharp slowdown in Eurozone inflation last month. 

The publication of the UK’s own consumer price index then sent GBP exchange rates sharply lower in mid-week trade. 

November’s CPI figures reported domestic inflation plummeted from 4.6% to 3.9%. This was well below forecasts for a drop to 4.4% and saw inflation strike its lowest levels since September 2021. 

Sterling nosedived as the sharper-than-expected cooling of inflation undermined the Bank of England’s (BoE) claim that interest rates will remain ‘higher for longer’. With the odds for a BoE rate cut in March rising to 40%, while a cut in May was fully priced in. 

The end of the week then saw some mixed UK data infuse some volatility into the Pound Euro exchange rate. 

Sterling was able to draw some support from the UK’s latest retail sales figures. November’s figures reported sales growth surged from 0% to 1.4%, greatly outpacing forecasts for a 0.4% expansion. 

However, the pound’s upside potential was capped by the accompanying GDP figures as the final estimate for growth in the third quarter was revised down to –0.1%, putting the UK at risk of slipping into a recession in the second half of 2023. 

Meanwhile, a lack of notable data then saw the Euro trade mostly sideways through the second half of the week. 

Post-Christmas lull to leave GBP/EUR to trade sideways? 

Looking ahead, a death of data and thin trading conditions in the post-Christmas period is likely to see the Pound Euro exchange rate trade with limited direction next week. 

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