EURGBP Fails to Spark After UK Inflation

The EURGBP exchange rate is flat in early trading on Wednesday after the release of UK inflation numbers. The latest report on prices showed the headline number rising from 0.4% to 0.7%, but this was slightly lower than market expectations.

The EUR to GBP rate is trading at 0.8630 and is within the recent range of 0.8500 to 0.8700 which marked the recent rally in the euro from yearly lows.

Inflation kept at bay ahead of reopening

The UK inflation rate rose in March but was still lower than analysts had expected with the price of fuel and clothing adding to the rise.

ONS statistician Jonathan Athow said: “The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February. However, food prices fell back on the year, as prices of some staples were lower than at the start of the pandemic.”

Inflation was surprisingly lower in the last reading for February after big cuts in clothing and footwear costs. Retailers were forced to discount goods early because of the lockdowns. Inflation is still expected to be higher in the year ahead, as the UK and other countries ease their virus lockdown restrictions.

The BoE has forecast that inflation could hit 2% by the end of this year and that would be higher than the pre-virus levels of 1.5%. The country saw inflation of 3% in 2018 but that was with higher interest rates and it will be interesting to see how interest rate expectations are affected with new lockdowns.

Central banks are keen to portray that inflation will be transitory and are sticking to their guns over the low-rate plans into 2023 or 2024. Bond markets could force them to add further stimulus in the months ahead if inflation picked up with re-openings.

ECB interest rates next

The ECB will announce its latest interest rate decision tomorrow and that is more than likely going to see no new moves. The ECB may give an update on further stimulus measures, but markets are really in a bit of a holding period where the growth rates and vaccination rates are well known and priced into the exchange rates.

This could change as we move further into the second quarter with the UK now open and seeing consumers piling back into retail and hospitality outlets. Europe is still not looking at a swift return in Q2 and some countries still grapple with higher cases.

The EMA has said yesterday that the Johnson & Johnson vaccine does have a small blood clot risk, but that it should be used as the “benefits outweigh the risks”. The constant delivery issues and regulatory halts have slowed the European rollout and the UK could streak further away from the Eurozone in growth if the problems continue. For now, the euro to pound rate will test the levels in the current range and we will see if sterling can resume a strong 2021, or pullback.

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