UK Inflation data this week likely to be a key driver for GBP/EUR

By Matthew Vassallo

The Pound found a pocket of support during Friday’s trading, helping to arrest the losses it suffered against the EUR earlier in the week.

Following this late rally, GBP/EUR rates rebounded to within two cents of the recent two-year highs achieved by GBP. This upturn was inextricably linked to the Bank of England’s recent decision to raise interest rates, albeit by the anticipated 0.25% hike to a base rate of 0.5%.

The central bank’s current stance was reinforced by BoE governor Andrew Bailey, who citied the current decade high inflation levels as the reason behind the aforementioned rate rise. He also alluded to the fact BoE members were keeping an open mind to the possibility of further hikes over the coming months, again centring this strategy around concerns that the current measures put in place may not be sufficient to counter the underlying catalyst of spiralling UK inflation levels.

Another external factor likely to have influenced investors risk appetite for GBP towards the later part of the trading week, were comments made by the ECB’s Chief Economist Philip Lane, which appeared to dampen the markets expectation that the European Central Bank were likely to change their dovish stance on any potential rise in interest rates, certainly in the near future. Whilst he did not completely close the door to the possibility, his comments certainly seemed to indicate the ECB were in no rush and would take a measured approach before taking any significant steps away from their current monetary policy stance.

Looking ahead and this week could bring with it some additional volatility for any clients with any short-term GBP/EUR currency exchange requirements. Tomorrow sees the release of the latest UK employments figures, including the official Unemployment Rate, which currently stands AT 4.1%. There is also Eurozone GDP & Trade Balance figures released alongside this, so expect a busy day in the markets as investors digest the relevant data releases.

However, it could be Wednesday’s UK inflation figures which hold the most interest for investors, as any indication of a further rise in the already decade high number of 5.4% will likely drive investors risk appetite for the Pound.

Looking at the US and whilst inflation levels look to have stabilised and unemployment numbers have dropped, there is no hiding away from the current stagnation in their economy. Economic forecasts have contracted, with the markets remaining cautious amidst the rising tensions in the East between Russia & Ukraine. Any dip in global market confidence will likely inadvertently boost the USD, which tends to strengthen in times of economic uncertainty due to its safe haven status amongst investors.