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Pound Euro Exchange Rate to Nosedive on Repriced BoE Expectations?

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GBP/EUR Exchange Rate Plummets to Two-Month Low amid Soft UK Inflation

The Pound Euro (GBP/EUR) exchange rate is crashing after UK inflation posted weaker-than-expected inflation data, slashing rate hike bets.

At time of writing the GBP/EUR exchange rate is around €1.1509, relatively unchanged from this morning.

Pound (GBP) Soured by Slashed Rate Hike Bets

The Pound (GBP) is tumbling this morning after the latest inflation report showed headline CPI cool further than expected. Inflation in June cooled to 7.9%, the lowest figure since March 2022 as fuel prices drastically dropped.

With UK inflation finally on a downward trajectory, the Bank of England (BoE) will likely welcome the news as they can finally take their foot off the pedal of rate hikes. With market participants now predicting that the central bank no longer needs to raise interest rates to 6%, the Pound slumped.

The Office for National Statistics (ONS) reported that inflation in the UK fell to 7.9%, far lower than a predicted 8.2%, and almost a percent drop from May’s figure. It was the first time that inflation surprised to the downside in five months. Core inflation, predicted to climb again, declined for the first time since January. Easing fuel prices contributed the biggest downward slide, aided by cooling food and household goods prices.

Despite a stronger-than-expected fall in inflation, headline CPI in the UK still lingers far above the target rate of 2%. But more concerningly, UK inflation is almost double that of most major economies. Chancellor Jeremy Hunt, said of the latest inflation data:

‘Inflation is falling and stands at its lowest level since last March; but we aren’t complacent and know that high prices are still a huge worry for families and businesses.

‘The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year.’

Looking ahead, the Pound will have to wait until Friday and the latest retail sales for further impactful data. A predicted 0.2% increase in retail sales could recoup some losses for Sterling as it would mark a second consecutive month of growth in the crucial retail sector.

Euro (EUR) Supported by Elevated Rate Hike Bets

Meanwhile, the Euro (EUR) soared against the flagging Pound after final Eurozone inflation was confirmed to have climbed by 5.5%, but with a surprise climb in core inflation.

A slight upward revision in underlying inflation saw the Euro climb on increased interest rate hike expectations from the European Central Bank (ECB). Core inflation, excluding volatile food and energy prices, edged up to 5.5% from 5.3%. A persistently hawkish ECB has maintained its position that if core inflation continues to rise, so will interest rates.

Looking ahead, tomorrow could see another contraction in Germany’s producer price inflation. Another decline in PPI could place some pressure on the Euro and temper rate hike bets.

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