GBP EUR Higher After Inflation Hits Another High 

The pound sterling stabilised against the euro on the news as traders wait for Thursday’s European Central Bank rate decision. The GBP EUR exchange rate was higher by 0.08% after the ninth-consecutive gain in inflation. The euro rallied hopes of a gas pipeline reopening from Russia. 

The GBP to EUR traded at 1.1740 after the latest data and could target the 1.1700 level with the ECB ahead. 

Euro gains on Gazprom pipeline reopening hopes

The price of the euro was boosted as hopes increased the Nord Stream pipeline would reopen as planned on Thursday. 

Russian energy firm Gazprom said that annual maintenance of the platform would end on July 21. The pipeline expected to resume operation on time, but likely at less capacity than its total of 160 million cubic meters per day. 

“Gazprom will return to the levels seen before July 11,” a source told Bloomberg. 

UK inflation rose again to reach 9.4% which was slightly higher than analysts had forecast. Transport costs were the main culprit, with higher prices for petrol and diesel, which were at new record levels in June. Food prices also rose at the highest rate since 2009 with meat and dairy products higher. 

Paul Dales of Capital Economics said that there were positive signs that the upward pressure on underlying inflation from global factors is easing. However, domestic factors will likely replace the pressure. CPI will continue to rise from 9.4% in June to 12.0% in October. He added that the Bank of England will likely increase interest rates from 1.25% to 3.00%, despite the prospects of a recession.  

Further data from the Office for National Statistics on Wednesday showed house prices across the UK rose to an annual rate of 12.8% in May, up from 11.9% in April. 

Lagarde ready to bring a new debt crisis tool to market

Only weeks after the ECB had declared an end to pandemic stimulus, the bank considered a new tool to prevent a debt crisis in peripheral markets. 

Policymakers must work through the political and legal ramifications of yet another bailout tool, but more clarity should be provided on Thursday. The end of the ECB’s stimulus program saw yields on the debt of indebted countries surging, leading to fears of market ‘fragmentation’. 

Sources say that a larger 50bps increase could be part of the give-and-take in negotiations over the crisis tool. As with the Greek bailout programs, countries benefiting from ECB bond purchases will also have to be conditioned. That would include guidelines on fiscal policy, with some officials suggesting that the European Commission, the European Stability Mechanism or both could also be involved. 

The Eurozone saw inflation figures released today. Core inflation was in-line at 3.7% with the Year-on-Year inflation rate also at expectations of 8.6%. The market will now look to Thursday’s central bank meeting. 

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