Sterling drops against the Euro and Dollar following inflation reading

Sterling has dropped in value against the euro and dollar following yesterday’s release of UK inflation data. Inflation has dropped to 7.9% which is lower than the expectation of 8.2% and the lowest reading for more than a year.

GBPEUR is trading more than 2% lower than the highs seen in the last couple of weeks. A transfer of €200,000 is buying £3400 more.

The unexpected drop off has shifted expectations on what the Bank of England will do next regarding interest rates. UK interest rates have been rising for over 18 months in attempt to bring inflation under control. This drop off is the first signal that interest rate rises could be having a positive effect.

Prior to yesterday’s data, peak interest rates were expected to be as high as 6.5 -7%. This was buoying the value of sterling against its major counterparts. Peak rates in the Eurozone and US are expected to be much lower.

Markets are now expecting interest rates to peak below 6%. Key central bank meetings are due in the next fortnight so we could see continued volatility depending on outcomes. First will be the Fed on 26th July followed a day later by the ECB, with the BoE on 3rd August.

Despite yesterday’s sell-off, sterling remains within range of the highest levels seen this year for buying euros and dollars.

Retail sales data released tomorrow could provide further volatility. An unexpected drop here would firm up the belief that interest rates are starting to have a positive effect and therefore weaken the position of sterling.

Please reach out below for further information on the market and forecast data collated by Lumon. I would be happy to talk through the cost implications rate movements will have on your upcoming payment or purchase.