EUR/GBP eases after steady inflation data; focus shifts to UK Budget
- EUR/GBP eases as traders digest inflation data from the UK and Eurozone.
- Eurozone HICP matches forecasts, keeping ECB policy expectations unchanged.
- UK inflation cools, reinforcing the case for a December BoE rate cut.
The Euro (EUR) pares back early strength against the British Pound (GBP) on Wednesday as traders digest a fresh round of inflation data from both the United Kingdom and the Eurozone. At the time of writing, EUR/GBP is trading around 0.8817, retreating from an intraday high near 0.8839.
Eurozone inflation figures offered no surprises, with October’s Harmonized Index of Consumer Prices (HICP) aligning fully with expectations. Headline HICP rose 0.2% MoM, matching the 0.2% reading from September.
On an annual basis, headline inflation came in at 2.1% YoY, exactly in line with both the consensus and the 2.1% pace seen a month earlier. Core HICP was 0.3% MoM, matching the forecast and unchanged from September’s 0.3% rise, while the yearly reading held at 2.4% YoY, matching expectations and consistent with last month’s 2.4% reading.
The steady set of inflation figures offered little incentive for the European Central Bank (ECB) to adjust its stance, reinforcing market expectations that interest rates will remain unchanged. According to the latest Reuters poll conducted between November 14-19, 84 of 90 economists expect the ECB to keep its deposit rate at 2.00% at the December meeting.
In the United Kingdom, the latest inflation release pointed to further easing in price pressures, strengthening the case for a potential interest rate cut by the Bank of England (BoE) in December. Headline Consumer Price Index (CPI) rose 0.4% MoM in October, in line with expectations after a flat reading in September.
On a yearly basis, CPI slowed to 3.6% YoY, matching the 3.6% forecast and down from 3.8% a month earlier. Core CPI also edged lower to 3.4% YoY from 3.5%, underscoring a gradual cooling in underlying inflation.
Beyond inflation, attention now shifts to the November 26 UK Budget, a key event risk for Sterling as markets assess the government’s fiscal direction. Investor sentiment remains cautious after recent shifts in tax communication, including the decision to drop a proposed income-tax rise.
Adding to the anticipation, Chancellor Rachel Reeves said today that “leaks ahead of the budget are not acceptable,” stressing that next week she will make “fair choices to deliver on the public’s priorities.” Prime Minister Keir Starmer also weighed in, noting that the upcoming Budget will be “based on Labour values.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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