The Pound Euro (GBP/EUR) exchange rate traded within a narrow range on Wednesday. Continued political instability in the UK weighed on the currency pair as well as a risk-on mood.
Above-forecast UK inflation limited drastic losses for the pair as the return to double-digit inflation prompted bets on further action from the Bank of England (BoE).
A downward revision to Eurozone inflation also underpinned GBP/EUR on Wednesday. Bets on hawkish action from the European Central Bank (ECB) kept gains limited, however.
At time of writing the GBP/EUR exchange rate was at around €1.1496, virtually unchanged from that morning’s opening figures.
Pound (GBP) Exchange Rates Drop as Inflation Returns to Double Digits
The Pound (GBP) fell on Wednesday amid heightened political uncertainty in the UK and a return of risk appetite. Fresh calls for Prime Minister Liz Truss’ resignation prompted fears in the markets that the UK could see another leadership contest.
An above forecast rise in inflation had a mixed effect on the Pound on Wednesday. Inflation rose to 10.1% in September off the back of the largest leap in food prices since 1980. The figures were above a forecast rise of 10%..
The high rate potentially helped to underpin Sterling amid bets on increased action from the Bank of England (BoE). On the other hand, the soaring costs added to the UK’s poor long-term outlook amid the country’s cost-of-living crisis.
Additionally, the data added to the uncertainty surrounding the UK government’s fiscal policy. Reports have indicated that Chancellor Jeremy Hunt is considering raising benefits and pensions in line with wage growth rather than inflation. Analysts are concerned that such a move could further dent UK household income.
Euro (EUR) Exchange Rates Drops as Annual Inflation Revised Lower
The Euro (EUR) slipped against its competitors on Wednesday amid a risk-on market mood. A downward revision of annual Eurozone inflation weighed on the single currency as well as renewed US Dollar (USD) demand.
September’s figures revealed that the Eurozone marginally avoided double-digit inflation despite soaring energy costs. The data printed at 9.9% versus forecasts of 10%.
The data is unlikely to deter markets from pricing in another bumper rate hike from the European Central Bank (ECB), however. A poll published on Wednesday by Reuters found that 75% of economist surveyed agreed that the ECB should push ahead with a 0.75% rate hike. These aggressive bets helped to underpin EUR.
The single currency may have also found support from the EU’s proposed energy support measures. On Tuesday, the European Commission unveiled plans to encourage joint gas buying amongst EU countries in an effort to curb the purchase of Russian gas.
GBP/EUR Exchange Rate Forecast: Will PM Truss Face Further Calls for her Resignation?
Looking ahead for the Pound, a second consecutive month of losses in the UK’s retail sector could push the currency lower. Figures on Friday are predicted to indicate a 0.5% fall in September’s sales volumes amid the country’s cost-of-living crisis and soaring prices.
Sterling could also come under pressure amid further political uncertainty in the UK. Further calls for PM Truss’ resignation could cause fears in the markets of another leadership change for the Conservate party. Additionally, any further drastic shifts in government fiscal policy could dent confidence in GBP.
For the Euro, German PPI figures on Thursday could see the single currency slip the index drops as forecast. The predicted slump could also weaken EUR if it causes investors to pare back bets on further ECB rate hikes.
Friday’s consumer confidence figures could also pull EUR lower if they fall as predicted. The data could also increase fears of an imminent recession in the Eurozone, denting long-term confidence in the Euro.
Finally for EUR, the single currency could be affected by further developments in the Russia-Ukraine conflict and further information on the EU’s gas price cap plans.
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