The Pound-Euro rate could hold firm if BoE rate expectations remain elevated, although a deterioration in risk appetite may favour the safer Euro.
The Pound Euro (GBP/EUR) exchange rate edged slightly higher on Tuesday as a recent rise in oil prices and inflation data from the Eurozone saw markets rethink central bank expectations.
At the time of writing, GBP/EUR was trading at €1.1677, up around 0.15% on the day.
DAILY RECAP:
The Euro (EUR) faced modest pressure on Tuesday amid the Eurozone’s latest consumer price index.
Although headline inflation accelerated as expected in August, rising from 2.9% to 3.3%, core inflation unexpectedly eased from 2.5% to 2.4%.
The slightly softer CPI data seemed to disappoint EUR investors, with the common currency trending slightly lower against some of its rivals amid a very slight pullback in European Central Bank (ECB) interest rate hike bets.
Meanwhile, the Pound (GBP) attracted some support on Tuesday as markets bet on the Bank of England (BoE) raising interest rates this year.
Renewed attacks between the US and Iran saw oil prices spike, which in turn fuelled inflation expectations.
UK government bond yields leapt to their highest level since 2008, with market pricing in around 32 basis points of tightening from the BoE by the end of the year. A November rate hike is now seen as almost 70% likely, with a second increase by February priced at roughly 80%.
This lent Sterling some support, although GBP’s upside was capped by concerns around higher government borrowing costs and their impact on the UK economy.
In addition, an anxious market mood dampened the increasingly risk-sensitive Pound’s appeal.
Near-Term GBP/EUR Forecast: Lack of Data to Limit Movement?
Looking forward, economic data from both the UK and the Eurozone is thin on the ground on Wednesday, potentially leaving the Pound Euro exchange rate to trade within a narrow range.
Risk appetite could influence the pairing. A souring mood could pressure the increasingly risk-sensitive Pound and support the safer Euro.
Our currency coverage draws on live market data, official economic releases and published bank research.
