Euro trims losses against British Pound after softer UK inflation data
- EUR/GBP holds losses around 0.8660 in Wednesday’s early European session.
- UK CPI inflation falls to 2.8% YoY in April, softer than expected.
- The ECB's Kocher warned that a June rate hike being unavoidable if Hormuz stays shut.
The EUR/GBP cross pares losses near 0.8660 during the early European trading hours on Wednesday. The British Pound (GBP) edges slightly lower against the Euro (EUR) following the release of the UK inflation report. Traders will take more cues from the preliminary readings of the Purchasing Managers’ Index (PMI) from the Eurozone and the UK, which are due later on Thursday.
Data released by the Office for National Statistics (ONS) on Wednesday showed that the UK headline Consumer Price Index (CPI) inflation eased to 2.8% over the year in April from a rise of 3.3% in March. This figure came in softer than the expectation of 3.0%. Meanwhile, the core CPI, excluding volatile food and energy items, rose 2.5% year-over-year in April, compared to March’s 3.1% print and below the market consensus of 2.6%.
On a monthly basis, the UK CPI arrived at 0.7% in April, versus a rise of 0.7% reported in March, below the market consensus of 0.9%. The GBP weakens against the EUR in an immediate reaction to the UK inflation data.
UK rate futures pointed to around 52 basis points (bps) of Bank of England policy tightening by December, versus about 60 bps on Tuesday, according to Reuters.
Reuters reported that UK Chancellor Rachel Reeves is set to announce sweeping reforms to give parliament authority to approve critical energy schemes.
On the Euro’s front, hawkish remarks from the European Central Bank (ECB) officials could underpin the EUR in the near term. ECB Governing Council member Martin Kocher said on Tuesday that a June rate hike is unavoidable if the Hormuz Strait remains closed, warning prolonged conflict will push eurozone inflation materially higher.
Additionally, ECB policymaker Joachim Nagel stated that the central bank may have to act at its June meeting as the Iran energy shock proves persistent and the probability of broader inflation spreading continues to rise.
The majority of economists from the Reuters poll, around 85%, indicated that the ECB would raise its deposit rate by 25 basis points (bps) to 2.25% in June, up from just over half expecting that before the April meeting.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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