• Pound (GBP) rises after hot inflation
  • Market pairs back rate cut bets
  • Euro (EUR) falls after ECB Lagard’s speech
  • More rate cuts from the ECB are expected than the BoE

The Pound Euro (GBP/EUR) exchange rate is rising after two days of losses. The pair fell -0.03% in the previous session, settling on Tuesday at €1.1616 and trading in a range between €1.1598 – €1.1644. At 09:00 UTC, GBP/EUR trades +0.19% at €1.1639.

The pound is pushing higher after UK inflation data came in hotter than expected in December, resulting in the market reining in interest rate expectations.

UK consumer price index (CPI) rose unexpectedly to 4% year on year in December up from 3.9% in the previous month and ahead of expectations of a fall to 3.8%.

Meanwhile, core inflation, which discounts more volatile items such as food and fuel, remained unchanged at 5.1%, defying expectations of a fall to 4.9%.

The data supports BoE governor Andrew Bailey’s recent comments that it’s too early to talk about cutting interest rates. With UK inflation still the highest between the UK, eurozone, and the US, the Bank of England is set to lag both the ECB and the Fed on rate cuts this year, which could keep the pound supported.

The market is now pricing in that the BoE will deliver around 116 basis points of easing by the end of 2024. The market also reassessed the timing of the first interest rate cut by the UK central bank, with the first rate cut in May being priced in at just 50%, down from 85% prior to the reading. The first fully priced-in rate cut is in June.

The euro is falling after Christine Lagarde, ECB president, said that the central bank will likely cut interest rates in the summer.

Her comments come after eurozone inflation data confirmed the earlier reading with a rise higher in consumer prices to 2.9%, up from 2.4% in November.

However, other ECB members have painted mixed messages as they spoke at the World Economic Forum in Davis Davos. Yesterday, ECB’s Villeroy de Galhau, the Bank of France president, said that it’s too early to declare victory over inflation. Meanwhile, ECB’s Centineo confirmed that the ECB remains data-dependent and that inflation is moving in the right direction, confirming a more dovish stance.

The market is pricing in around 141 basis points of interest rate cuts by the central bank before the end of the year.