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GBP/EUR: Euro falls despite inflation remaining unchanged

31st August 2023

Pound (GBP) rises after hawkish comments from BoE’s Pill
Rates are likely to stay higher for longer
Euro (EUR) falls even as inflation holds at 5.3%
ECB rate decision is in 2 weeks

The Pound Euro (GBP/EUR) exchange rate is rising for a second straight session. The pair rose +0.18% in the previous session, settling on Wednesday at €1.1638 and trading in a range between €1.1612 – €1.1652. At 10:35 UTC, GBP/EUR trades +0.19% at €1.1660.

The pound is pushing higher for a second straight session, boosted by hawkish comments from Bank of England’s chief economist Huw Pill. Pill considers that interest rates must stay sufficiently high for some time in order to bring inflation back to the 2% target rather than escalating rapidly and then dropping quickly.

His remarks are a signal of how officials are thinking ahead of the BoE interest rate decision in September. The market is expecting a 25 basis point hike to 5.5%, which will mark the 15^th straight hike. The market is then expecting another hike by the end of the year to 5.75%, which could be the peak rate.

Huw Pill acknowledged the risk that the central bank could over-tighten monetary policy, which could cause unnecessary damage to the economy. However, this was considered the lesser risk compared to runaway inflation.

Today, there is no high impacting UK economic data, investors will continue digesting Pill’s remarks ahead of PMI data tomorrow.

The euro is falling despite eurozone inflation unexpectedly rising, a move which could cause alarm at the European Central Bank.

Consumer prices rose 5.3% year on year in July, unchanged from June. Analysts had forecast a decline to 5.1% annually. This means prices are stuck at over double the central bank’s target of 2%. Meanwhile, core inflation, which strips out volatile items such as food and fuel, cooled to 5.3%, down from 5.5%.

The ECB will meet in two weeks to judge whether to hike rates for a 10^th straight meeting. With inflation looking sticky, there is a good chance another hike in on the cards even as economic growth slows.