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Pound Euro Exchange Rate to Weaken on Untenable Prime Minister Position?

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GBP/EUR Exchange Rate Wavers on Hotter-Than-Expected UK Inflation

The Pound Euro (GBP/EUR) exchange rate traded erratically in the wake of UK CPI reading edging up to double digits once again.

At time of writing the GBP/EUR exchange rate is around €1.1475, relatively unchanged from this morning’s opening levels.

Pound (GBP) Wavers on Soaring CPI Inflation

The Pound traded erratically today in the wake of inflation data that showed annualised headline CPI reaching 10.1%, matching the 40-year high of July’s reading.

Exceeding market expectations of 10%, inflation surged back up above double digits as food prices were the biggest drivers. The quickest pace of rising since 1980, food prices continue to weigh on the cost-of-living crisis. With August’s headline CPI falling to 9.9% due to tumbling fuel prices, the continued fall in petrol and diesel prices were not enough to offset the surging food and drinks prices.

However, the concerning underlying factor in September’s inflation reading is core inflation. Excluding volatile items such as food, alcohol, and energy, prices surged to 6.5% from 6.3%. Poverty organisations such as the Joseph Rowntree Foundation are worried that widespread poverty will continue if benefits do not rise in line with inflation. Rebecca McDonald, Chief Economist said:

‘The cost of living has millions fearing for the future, with the price of food rising faster than at any point since 1980. This Government surely cannot wish to be remembered for withholding either cash or stability from families.’

Looking ahead, the Pound is likely to remain under pressure as confidence in Prime Minister Liz Truss appears as weak as ever. The mounting pressure on her leadership could deter GBP investors as political uncertainty is a recipe for jittery markets.

Euro (EUR) Undermined by Softer-than-Expected Inflation

Meanwhile, the Euro is relatively subdued today as inflation for the Eurozone printed lower than expected. Interest rate hike expectations suffered as a consequence, dampening demand for the single currency.

Headline CPI inflation for the Euro area was revised lower to 9.9%, down for a preliminary reading of 10%. Despite softer than expected, the reading is still the Eurozone’s highest rate since comparable records began in 1991.

Looking ahead, and the Ukraine conflict is set to keep a firm lid on any meaningful gains for the Euro. With President Putin announcing martial law for the four annexed Ukrainian regions, concerns of escalated conflict could deter Euro investors.

By imposing the law on the illegally annexed regions of Ukraine, movement will be restricted, and will give increased power to the Kremlin-installed heads of Donetsk, Luhansk, Zaporizhzhia, and Kherson.

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