The GBP EUR exchange rate was higher by 0.48% on Wednesday after inflation came in above expectations. Sterling saw new highs for the year against the euro at 1.1900 as traders ramp up their rate hike expectations.
The GBP to EUR was trading above 1.1916 after falling short of that level in late-October.
UK inflation surge makes rate hike in December ‘more likely’
The pound sterling surged against the euro after the ONS announced that CPI inflation had risen to 4.2% in the year to October. The figure was 0.3% above analysts’ expectations and well higher than the previous month’s 3.1%. The figures are now at levels not seen since December 2011 and the BoE will be under further pressure to lift interest rates.
The current rise in prices will have significant implications for living standards with households already feeling the squeeze. An individual with a salary £30,000 in April 2021 would need to see nominal wage growth of 7.1% to maintain the same standard of living if the BoE are right.
The surge in inflation has been driven by several factors with demand increasing sharply after the lockdowns and the global supply chains have also been under stress with bottlenecks and staff shortages.
Despite the latest surge, Bank of England policymaker Catherine Mann said the public are confident that the central bank has inflation under control:
“British households, businesses and financial markets all remain confident that the Bank of England will return inflation to its 2% target, she said.
“We feel confident that they believe that the Bank of England can and will – those are important ingredients right, can and will – undertake the appropriate policies response to bring inflation back to 2%”.
Some in the financial community are maybe less confident after the recent inflation surge.
Eurozone also pressured by prices, energy fears
Higher inflation is also affecting the eurozone with the latest data from Eurostat showing a jump to 4.1 percent.
“Price increases are running at broadly similar levels to those seen in the UK. Unsurprisingly, Eurozone inflation is being driven by the same factors pushing up prices in the UK. Specifically, higher energy costs as well as a jump in the price of cars and household goods,” said analysts at Quilter Cheviot.
Meanwhile, the European Central Bank has remained stubborn on rates with president Christine Lagarde saying this week that she believed tightening policy would choke the recovery. The Bank of England has made it clear they will make a move with the Governor stressing a “need to act”.
The ECB is sticking harder to the transitory inflation narrative harder than other central banks and they believe that inflationary pressures will not lead to large wage increases. Investors are looking for the bank to scale back their pandemic QE program in early 2022, but the bank has stressed that rate hikes are still a long way off.
The pound sterling versus the euro has the 2020 highs of 1.2000 in its sights again.
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