- Pound (GBP) is after gains yesterday
- UK inflation rose by a less-than-forecast 2.2%
- Euro (EUR) rises GDP & German wage data
- German wage growth reached 5.6%
The Pound Euro (GBP/EUR) exchange rate is falling after gains yesterday. The pair rose 0.2% in the previous session, settling on Tuesday at €1.1701 and trading in a range between €1.1676 and €1.1722. At 10:00 UTC, GBP/EUR trades -0.4% at €1.1653.
The pound is falling after UK inflation rose less than expected in July, which will be a relief to policymakers at the Bank of England.
UK headline inflation rose to 2.2% year on year in July, up from 2% in June, but was below the 2.3% predicted. Meanwhile, core inflation fell more than expected to 3.3%, down from 3.5%. Service sector inflation also fell more than expected to 5.2%, down from 5.7% previously and below the 5.5% expected, marking the largest drop in service sector inflation in a year.
The Bank of England has been closely monitoring service sector inflation amid concerns that it has been persistently high. However, this large undershooting of service sector inflation will be a relief to the Bank of England, which cut interest rates last week.
Following the data, the market has increased expectations that the central bank could cut interest rates again in the September meeting. The market is now pricing in a 40% probability of another 25 basis point rate cut in September, up from 30% prior to the data. The repricing of Bank of England rate cut expectations has pulled the pound lower.
The euro is rising after capitalising on the weaker pound and as investors digest the latest GDP
and wage data from Germany.
Q2 GDP for the wider eurozone came in at 0.3%, which aligns with the preliminary reading. This was the 2nd print, so it tends to be less market-moving.
Instead, the focus was on wage growth in the eurozone’s largest economy, which rose at its fastest rate this century. Negotiated wages in Germany are expected to jump by 5.6% in 2024, based on only deals agreed between January and June.
ECB president Christine Lagarde cited concerns over wage growth as the hurdle for additional rate cuts.
The ECB cut rates by 25 basis points in June, and the market is now questioning whether it will cut again in September.
