GBP/EUR: UK GDP & EU Inflation Impacts Pound vs Euro
  • Pound (GBP) falls as inflation holds steady at 4% YoY
  • CPI fell -0.6% on a monthly basis
  • Euro (EUR) rises after GDP data shows it avoided a recession
  • GDP was 0% in Q4 2023

The Pound Euro (GBP/EUR) exchange rate is falling after three days of gains. The pair rose +0.28% in the previous session, settling on Tuesday at €1.1754 and trading in a range between €1.1695 – €1.1767. At 14:00 UTC, GBP/EUR trades -0.35% at €1.1717.

The pound is falling after UK inflation came in cooler than expected, causing investors to reassess hawkish Bank of England bets.

Inflation, as measured by the consumer price index (CPI), remained at 4% in January, which was below the 4.1% level forecasts and in line with December’s 4% reading.

On a monthly basis, UK CPI fell -0.6%. This was a much larger drop than the -0.3% fall forecast and down from the 0.4% rise in December.

Meanwhile, core inflation, which removes more volatile items such as food and fuel, also held steady in January at 5.1% year on year, defying expectations of a rise to 5.2%. On a monthly basis, core inflation tumbled -0.9%.

Following the data the markets added to the number of interest rate cuts that they expect from the Bank of England this year and investors are now forecasting around 70 basis points of rate cuts in 2024. However, it’s worth noting that wage pressures in the UK remain strong, and the pace of inflation is still twice the Bank of England’s target, which warrants a more cautious approach from policymakers.

The euro is rising for the first time in three days after GDP data confirmed that the eurozone avoided a recession at the end of 2024, although the data also showed that the economy was stagnant, recording just 0% growth quarter on quarter. This follows a 0.1% contraction in the previous quarter.

Looking at the overall European landscape the biggest contraction was in Ireland which shrank by 4.8% annually, followed by Estonia which shrunk 3% year on year. Germany, the eurozone’s largest economy, also saw a weak performance, with its GDP shrinking by 0.3%.

Meanwhile, the number of people employed in the eurozone increased by 0.3% in the final quarter of last year. This translates to 169.3 million people having a job.  These strong labor markets in the eurozone have been identified by the ECB as a potential reason to push back on rate cuts.