- Pound (GBP) rises as inflation cools to 2%
- But service sector inflation was high at 5.7%
- Euro (EUR) drifts lower in quiet trade
- German ZEW economic sentiment was weaker than expected
The Pound Euro (GBP/EUR) exchange rate is rising after 3 days of losses. The pair fell -0.03% in the previous session, settling on Tuesday at €1.1829 and trading in a range between €1.1846 and €1.1812. At 12:00 UTC, GBP/EUR trades 0.08% at €1.1843.
The pound is heading higher after UK inflation data, which came ahead of tomorrow’s Bank of England interest rate decision.
Data from the Office of National Statistics show that inflation, as measured by the consumer price index, cooled in line with forecasts to 2%, the Bank of England’s target level. This was down from 2.3% near one year in April and marks the first time that inflation has been at 2% since July 2021.
However, service sector inflation, which the Bank of England monitors closely, was hotter than expected, at 5.7% year on year, down from 5.9% but still ahead of the 5.5% forecast.
The Bank of England will want to see UK service sector inflation cooling further before cutting interest rates.
With this in mind, and going to the UK election on July 4th, which means that there are restrictions to the amount of BoE communication, Bank of England policymakers are not expected to cut rates tomorrow but could prepare the market for an August rate cut should the data support this.
Meanwhile, the euro has traded lower ahead of a quiet economic calendar.
Data yesterday showed that German consumer sentiment improved less than expected, possibly due to an increase in inflation.
Data yesterday also showed that eurozone inflation rose to 2.6% year over year in May, up from 2.4% as unemployment is at a record low and wage growth is stronger than expected.
The ECB cut interest rates by 25 basis points at the start of the month; however, given price pressures, there are doubts over when the next cut could be made.
