GBP EUR Higher as Inflation Beats Expectations

GBP EUR Exchange Rate: The Week Ahead October 24th

The GBP EUR exchange rate was 0.20% higher on Wednesday after the UK saw its highest inflation since 1997. The figures were affected by the ‘Eat Out to Help Out’ scheme from a year ago but alarm bells are ringing over the rise in the cost of living.

The GBP to EUR trades at 1.1715 after a strong bounce from around 1.1620.

UK inflation at highest level since 1997

The Office for National Statistics (ONS) has said that the cost of living in the UK has increased by 3.2 per cent in the year to August. Analysts had been expecting a 2.9 per cent increase in this release.

The figures were up by 0.9 per cent on the year, reflecting the largest monthly increase ever noted by the ONS.

Much of the spike in living costs was driven by stubbornly high prices for petrol, used cars and food, which were all up by 2 per cent from the July figures.

However, the ONS said that inflation should drop again next month, as August’s figures were affected by last year’s Eat Out To Help Out program, which saw restaurant meals discounted by 50 per cent.

Sarah Coles, analyst at Hargreaves Lansdown, said: “Inflation has taken a breath taking leap, surging at its fastest rate in over 20 years.”

“It was given a significant shove by the Eat Out to Help Out scheme discounts a year earlier, which will drop out of the figures next month,” she added.

“However, much of this enormous jump is powered by the same alarming imbalance between supply and demand that has seen yawning gaps open up on the supermarket shelves. It spells trouble for shoppers, savers and the broader economy.”

Euro inflation ahead on Friday

The next high-level economic data is the eurozone’s turn for core inflation with analysts expecting a jump to 1.6%.

Europe’s inflation is lagging that of the UK and that puts more pressure on the Bank of England to act on interest rates and stimulus.

But worse for the European Central Bank is that long-term inflation swaps are already pricing in their 2% inflation target.

ING said: “The relentless rise in EUR inflation swaps since their trough in the first stages of the Covid-19 crisis in March 2020 is striking… it is catching many investors’ attention as indicators such as the 5Y5Y rates reaches their 2017 peak, and as they are no longer far from the ECB’s inflation target of 2%.”

The bank added that hawkish comments could be a risk for the pound versus the euro, saying:

“In short, inflation remains a concern, but we doubt it will be enough to stop markets from expecting further ECB easing to be announced in December, even if hawkish headline risk remains ever present as early September has shown.”

The GBP to EUR exchange rate has been rebounding from lows near the 1.1620 level recently and is trying to find further support above the 1.17 level.