- Pound (GBP) is falling after two days of gains
- UK CPI rose to 3.8% YoY from 3.6%
- Euro (EUR) is rising against the pound and the USD
- ECB President Lagarde warned over growth
The Pound-Euro (GBP/EUR) exchange rate is falling after modest gains yesterday. The pair rose 0.02% in the previous session, settling on Tuesday at €1.1583. It traded between €1.1562 and €1.1593. At 16:15 UTC GBP/EUR trades -0.37% at €1.1543.
The pound is falling after hotter-than-expected UK inflation data, doubts over near-term interest rate cuts, but it isn’t expected to provide lasting support to sterling.
UK inflation rose 3.8% year on year in July, up from 3.6% in June, and ahead of expectations of 3.7%. Core inflation, which measures inflation excluding food and fuel, remained at 3.7%, still some distance from the Bank of England’s 2% target.
While the Bank of England cut rates by 25 basis points this month, the market is not expecting the central bank to reduce rates further until February. While higher interest rates are often considered positive for a currency, but that’s not the case if high inflation weakens the economy, leading to more rate cuts in the future.
With this in mind, the Bank of England may be cutting interest rates more deeply in 2026. HSBC expects the central bank to reduce rates to 3% by Q3 next year, down from 4% currently.
The euro is rising against the pound and the US dollar on Wednesday, boosted by 7 lbs despite weak, cooler-than-expected German wholesale inflation, and after ECB president Christine Lagarde struck a cautious tone in her remarks at the World Economic Forum business summit.
Lagarde warns that eurozone growth will likely weaken in Q3, noting that a slowdown was already evident in the second quarter of the year. Sighted cooling my momentum and demand following earlier front-loading of activity amidst the trade uncertainty.
Christine Lagarde welcomed the EU-US trade agreement as a source of relief; however, she noted there was still lingering trade uncertainty.
On the data front, German producer prices registered the steepest fall in 13 months, dropping 1.5% year on year in July.