EUR GBP Higher Ahead of European Inflation Reading

The EUR GBP exchange rate was higher by 0.13% on Thursday with the latest eurozone core inflation reading ahead today. The pound had been supported by a Goldman Sachs report that saw its forecast for a BoE interest rate hike brought forward by a year. Retail spending weighed on the pound with worries about the pace of the consumer recovery, while ECB President Christine Lagarde saw a faster than expected European recovery.

The EUR to GBP rate is now trading at the 0.8545 level ahead of today’s data.

Lagarde sees faster than expected European recovery

The eurozone economy is recovering quicker than expected just six months ago, due to a rapid vaccination campaign that allowed the economy to reopen, according to European Central Bank President Christine Lagarde on Thursday.

The combined GDP of the 19 countries sharing the euro was now expected to return to its pre-crisis level before the end of 2021, even if the growth trend was yet to fully recover, Lagarde said in a speech.

Her comments will raise speculation that the ECB will announce a schedule for tapering its stimulus measures at the December meeting.

Today will see the latest core inflation number from the eurozone with a forecast jump to 1.6%. This is below the ECB target of 2% inflation, which the bank said it will be happy to relax in the short-term. However, 10-yr inflation swaps in the European financial market are tracking the 2-yr at near 2% as investors are unsure whether the price pressures are indeed ‘transitory’.

The EUR to GBP is trading near the 0.8550 and is looking to find a base for a move back to the 0.8600 level.

Goldman Sachs moves its rate hike forecast forward to May ‘22

Investment bank Goldman Sachs supported the pound sterling with a prediction that the Bank of England will move earlier on a rate hike, following this week’s stronger UK employment and inflation reports.

“The recent data on the UK labour market have been stronger than expected, and indicators imply a smoother furlough unwind than we previously assumed,” said Steffan Ball, Chief UK Economist at the bank.

The ONS reported that employment levels in Britain were back to their pre-crisis levels while wage growth also increased. Vacancies were also at a record which will help cushion the jobs market when the furlough scheme ends on September 30^th.

“Our analysis suggests that underlying wage growth is strong and inflation pressures are firming more than anticipated,” said Ball.

“MPC member commentary, combined with the new Chief Economist appointment, suggests that a majority of the committee now view the minimum conditions for starting monetary policy tightening have been met,” added Ball.

In their latest analysis, Goldman Sachs have moved their baseline forecast for an interest rate increase to May 2022. The bank’s previous forecast was for the first increase in the third quarter of 2023.

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