GBPEUR Slips as Markets React to Inflation

The GBPEUR exchange rate was 0.17% lower on Thursday as markets woke up to the inflation threat. We’ve noted on this blog that once economies reopen, the threat of rising prices may defy the cosy “transitory” talk form central banks.

The US stock market was sharply lower with the Dow Jones Index off 681 points, or almost 2%, and this has weighed on the pound with the FTSE also sharply low this morning by almost 1%.

The GBP to EUR has still have a strong week but opens at 1.1620 after highs around 1.1675 on Wednesday.

US inflation blasts higher

The latest US consumer price inflation number saw the largest monthly rise in US core prices in almost 40 years this week, which led to a shar sell-off in the value of US stocks. The CPI number rose 0.8% month-to-month in April and increased to a 4.2% year-on-year rate. This was the fastest increase since September 2008 and was much higher than the Federal Reserve’s beloved 2% target. Core CPI (excluding food and energy) was higher by 3% on the month.

The data was a slap in the face to traders who have listened to central banker talk of “transitory” inflation. That term has been used in policy announcements from the US to the UK, and Australia as central banks try to keep bond yield bulls away from the market. They will now have a fight on their hands and the pound v euro has suffered in the fallout.

The British economy is close to a full reopening and has seen its own inflation increase in recent months, so it will outperform the euro on prices, with the single currency still hampered by a slow reopening. The ECB’s Schnabel said ahead of the latest German inflation number that the country could see 3% inflation this year but that it would stop there. Traders will be reassessing that idea after the latest US data, which is also based on shortages following the Suez Canal issue.

UK GDP had boosted pound

The GBP had rallied on Wednesday after UK GDP was better than expected for the 3 months to March. The -1.5% loss was better than the -1.7% that analysts had forecast and the economy has seen improvements since then.

UK growth was boosted by schools reopening and there was also a good bounce in retail sales for March, which was before the green light was given to reopen. Construction was another highlight 8% surge in February and March, with activity rising above pre-virus levels. The Bank of England upgraded the UK growth outlook to above 7% but stressed that the inflationary outlook would be contained. That assessment will be pressured now after the US CPI data and the next two UK figures for prices will be of interest.

The GBPEUR will now look for a move towards the 1.18 highs which were registered in early-April, while the 1.15 level will be support.

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