- Pound (GBP) is rising for a second day
- UK inflation held steady at 2% vs 1.9% expected
- Euro (EUR) falls as inflation cooled
- ECB rate decision is tomorrow
The Pound Euro (GBP/EUR) exchange rate is rising after two days of losses. The pair fell 0.07% in the previous session, settling on Tuesday at €1.1893 and trading in a range between €1.1887 and €1.1911. At 20:00 UTC, GBP/EUR trades +0.04% at €1.1897.
The pound has risen to a 2 year high against the euro and a yearly high against the US dollar after UK inflation data was stickier than expected raising doubts over when the Bank of England could start cutting interest rates.
UK inflation was 2% year on year in June, in line with May but above expectations of 1.9%. Meanwhile, service sector inflation, which Bank of England policymakers will be watching closely, was also hotter than expected at 5.7%, defying expectations of a fall to 5.6%. Restaurants and hotels saw prices rise sharply, which could be the Taylor Swift effect ass her Eros tour came to the UK,
Following the data, the markets have reined in Bank of England rate cut expectations. Investors are now pricing in a 30% probability of a rate cut in August down from a 50% probability at the start of the week. This reining in of rate cut expectations sent the pound higher.
Attention will now turn to UK jobs data, which is due tomorrow. Policymakers will be watching wage growth, which has also remained uncomfortably high, lifting sticky service sector inflation.
The euro fell after eurozone inflation eased to 2.5% year on year in June, down from 2.6%. While this is an encouraging sign that inflation is moving in the right direction, it’s unlikely to encourage the ECB to cut interest rates sooner.
The ECB rate decision is tomorrow, and the central bank is widely expected to leave interest rates unchanged at 3.75%. However, the ECB could prepare the market for a rate cut in September should inflation continue to ease further.
