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Sliding Odds of August BoE Rate Hike Benefit Euro to Pound Sterling (EUR/GBP) Exchange Rate

Euro Currency Forecast

Euro Pound Sterling (EUR/GBP) Exchange Rate Boosted by Steady UK Inflation

As the headline UK consumer price index held steady on the year in May this left the Euro to Pound Sterling (EUR/GBP) exchange rate on a stronger footing.

Some forecasts had suggested that the inflation rate would push a little higher from its one-year low of 2.4%, leading to investor disappointment when any uptick failed to materialise.

While this weaker reading limits the negative impact of inflation on fragile domestic wage growth this also puts less pressure on the Bank of England (BoE) to tighten monetary policy.

As a result, Pound Sterling (GBP) exchange rates remained on a general downtrend on Wednesday morning.

With investors concerned that inflation may have already peaked the appeal of the Pound naturally diminished.

Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), noted:

‘It is possible that inflation may start to drift upwards in the coming months as the recent spike in oil prices filters through supply chains and into higher consumer prices.

‘However, any pick-up in inflation would be relatively short-lived, with price growth likely to resume its downward path later in the year as the pressure from oil prices eases.’

Underwhelming Eurozone Industrial Production Failed to Dent Euro Pound Sterling (EUR/GBP) Exchange Rate

Disappointment greeted April’s Eurozone industrial production data, although this failed to particularly dent the Euro to Pound Sterling (EUR/GBP) exchange rate.

Rather than accelerating to 3.0% on the year as forecast growth in production instead eased to 1.7%, undermining confidence in the domestic outlook.

With the Eurozone economy struggling to recover its earlier momentum in the second quarter this weaker showing gave investors less incentive to favour the Euro (EUR) on Wednesday.

However, the downside potential of EUR exchange rates remained limited as markets braced for the latest Federal Reserve and European Central Bank (ECB) policy announcements.

Solid first quarter Eurozone employment change data also helped to support EUR exchange rates, with the domestic economy still showing signs of resilience in spite of its weaker growth momentum.

Euro Pound Sterling (EUR/GBP) Exchange Rate Volatility Forecast on ECB Decision

The Euro to Pound Sterling (EUR/GBP) exchange rate could come under fresh pressure if the ECB’s June policy meeting proves dovish.

Unless policymakers are confirmed to have discussed the end of the long-running quantitative easing programme the mood towards the Euro could sour significantly.

A more cautious performance from ECB President Mario Draghi could weigh heavily on EUR exchange rates, given market hopes that the central bank is turning towards a more hawkish policy bias.

If there are comments on the likely end point of quantitative easing, however, the Euro could strengthen further against its rivals.

Any indication that the ECB could soon return to a monetary tightening bias looks set to offer the Euro to Pound Sterling (EUR/GBP) exchange rate a strong rallying point.