EURGBP Bounces After Higher Eurozone Inflation

The EURGBP exchange rate was trading 0.23% higher in early trading on Thursday after the Eurozone saw higher inflation than expected. Today will see the latest interest rate and monetary policy announcement from the Bank of England and traders are also booking profits on sterling before the event.

EURGBP is trading at 0.8835 and the single currency is looking to get back above the 0.8870 level which was a strong support in the second half of 2020.

European Inflation Spurs Euro Buying

Eurozone inflation surged higher than analysts’ expectations in January, largely driven by rising energy costs and Germany’s tax increase. Annual inflation in the 19 EU countries that use the single currency saw inflation jumping to 0.9% in January after being stuck at -0.3% over the past four months.

Economists had expected inflation to come in at 0.5% and the surge higher will boost the expectations of euro bulls. The ECB had criticized the strength in the euro during the second half of 2020 and even threatened currency intervention. This put a cap on the potential for a move higher in the EUR to GBP exchange rate, but this will ease as the bloc moves out of a deflationary threat.

The ECB has promised ultra-easy policy for years to come, with price pressures muted and a recovery from a pandemic-induced recession dragging out.

The euro was also boosted by news that the ECB’s former President, Mario Draghi, was handed a mandate to lead the Italian government after the resignation of Giuseppe Conte. The move would ease concerns over the country’s political instability and will please bondholders.

Bank of England Announces Latest Interest Rate

The Bank of England will announce the latest path for UK interest rates and monetary policy today and analysts expect little change on the rate front. The bank is also not expected to increase stimulus from the current £150bn level. Despite this, the event should provide volatility in the EUR to GBP rate as the bank releases its latest quarterly report and a guide for negative interest rates.

Some see the bank’s comments on negative rates as a bluff for now, but if the government keeps pumping out money then there is a possibility of going there this year.

The bank’s job has been made easier by the vaccine rollout in the country and Chief Economist Andy Haldane recently commented that he expects a Q2 bounce for the economy. Next month sees another budget from Chancellor Rishi Sunak and the BoE may also hold off on stimulus to allow the Treasury to take centre stage.

The EUR to GBP could move towards the support at 0.8685 if sterling sees further support on the BoE update. Speak to us before the interest rate decision to see how your upcoming currency exchange could be impacted.

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