The GBPEUR exchange rate was 0.07% lower on Wednesday despite inflation coming in slightly ahead of expectations. The market will now wait for the European version of the data and the UK also saw decent employment numbers yesterday.
The GBP to EUR trades at 1.1590 as the pair seems unable to hold the 1.1600 level.
Inflation rises with UK economy reopening
UK inflation saw a 1.5% increase in April compared to a year earlier as the country’s economy bounced back from lockdown and prices for energy and clothing rose.
The headline consumer price index rate was sharply higher from the 0.7% reading in March. On a monthly basis, the figures were highlighting a 0.6% increase in April compared to 0.3% in March, and this is similar to the employment numbers seen on Tuesday.
Grant Fitzner, ONS Chief Economist said:
“Inflation rose in April, mainly due to prices rising this year compared with the falls seen at the start of the pandemic this time last year. This was seen most clearly in household utility bills and clothing prices.”
The pound is acting sluggish as traders are maybe disappointed that the number was not showing the same sharp increase as inflation in the United States and it takes the heat off the Bank of England for now.
Some of the gains are not reliant on the lockdown effect with gas and electricity prices seeing an increase of more than 9% year on year. The BoE are forecasting a rise to 2% for inflation and moving closer to 2.5% in the second quarter. Despite this, they are expecting a drop to 2% by mid-2023 and the market was doubting that prediction.
European inflation follows the Q1 GDP update
The European economy will also see inflation numbers released this morning and the market is expecting a reading of 0.8% for the month of April. The European economy is still largely on lockdown and this could mean faster inflation on reopening.
Yesterday saw GDP numbers come in as expected with a -0.6% loss for Q1 and that should be on track for the 4.3% predicted for the EU economy in 2021. The market still sees the economy having to wait until the end of 2022, before reaching pre-virus levels and this is a year behind the UK.
Despite this, the pound is still being priced modestly against the euro. Some of this can be attributed to the current talk in the UK economy about the so-called Indian variant virus strain, but it is highly likely that any delay to reopening would also hit the European growth plan. 110 direct flights have continued to land in the UK from India after it was placed on the red list as the UK government continues its insane travel policies of fines for travellers levelling, yet a free flow of arrivals from high risk nations.
The GBPEUR has the next support level at 1.1500 and will need a stronger European inflation number to get there today.