EUR GBP Lower with German Inflation, UK GDP Ahead

The EUR GBP exchange rate was trading near the lows of the year after German inflation figures confirmed the highest levels since 1993. The figures will put pressure on the ECB to consider its zero percent interest rate strategy.

The EUR to GBP rate is trading at 0.8465 with UK GDP ahead for the second quarter.

German inflation soars in threat to ECB plans

Germany’s economy registered a 3.8% rise in consumer prices in the country last month, according to the Federal Statistical Office. This is the highest figure since December 1993 when prices jumped to 4.3%. The latest data could become a headache for the European Union, where Germany is home to the bloc’s most important economy, while all nations have different debt levels.

Under the ECB’s preferred measure, the Harmonised Index of Consumer Prices (HICP), inflation in Germany jumped to 3.1% year-on-year, which is also the highest since 2008.

ING bank economist Carsten Brzeski said: “Next stop: 4 percent”. Jens Weidmann, head of the Bundesbank, went further recently and saw consumer prices hitting five percent before year-end.

The federal statistics agency Destatis blamed the rise in prices on higher energy prices and the full base effect from a six-month sales tax cut in 2020, which is showing up in the data for the first time. The VAT cut was introduced to dampen the impact from the coronavirus shutdowns.

UK consumer price inflation has also been forecast to rise further to 3.9% next year, according to a think tank.

The National Institute of Economic and Social Research (NIESR) said that inflation would move to almost double the BoE’s target rate in early 2022, before falling back to 2% in 2023 following an interest rate hike.

A look ahead to the UK GDP data for Q2

Today sees the release of the UK’s GDP growth figures for the second quarter.

June’s data will give an early indication of the country’s reopening and whether the virus has impacted the growth trajectory. Consensus estimates are for 4.8% growth, which is two-tenths below the BoE forecast.

The economy contracted 1.6% in the first quarter and is expected to show a year-on-year growth rate of 22.1%. The pound sterling has moved above the highs for the year this week and this latest data set could see a high hurdle rate for the UK economy. That would make sterling vulnerable at the highs and could see a double bottom in price for the EUR to GBP if there is a setback.

UK virus cases are back on the rise towards 30,000 and that could also derail the British recovery. It comes as the UK recorded over 29,000 new Covid cases and a further 104 fatalities, “within 28 days of a positive test.”

The EUR v GBP traded to the April yearly lows but was rejected and that brings the possibility of further lows in the currency pair.

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