EUR/GBP holds below 0.8450 as UK CPI inflation steadies at 2.2% YoY in August

EUR/GBP weakens around 0.8445 in Wednesday’s early European session.
The UK annual CPI climbed 2.2% in August vs. 2.2% expected.
Investors will shift their focus to the Eurozone HICP inflation for August, which is due on Wednesday.

Lallalit Srijandorn FXStreet

The EUR/GBP cross loses its recovery momentum near 0.8445 during the early European session on Wednesday. The Pound Sterling (GBP) edges higher after the UK inflation data. The attention will shift to the Eurozone Harmonized Index of Consumer Prices (HICP) data, wishes to you later in the day.

Data released by the Office for National Statistics showed on Wednesday that the UK CPI rose at an annual pace of 2.2% in August. The figure was in line with the market consensus and the previous reading of 2.2%. Meanwhile, core CPI, excluding volatile food and energy items, climbed 3.6% YoY in August versus 3.3% in July, hotter than the 3.5% expected. The GBP attracts some buyers in an immediate reaction to the UK CPI inflation data.

The Bank of England (BoE) interest rate decision will be in the spotlight on Thursday. The UK central bank is anticipated to keep rates on hold before adopting a more aggressive stance from November. The odds of another 25 basis points (bps) rate cut in September increased but remain relatively low nearly 35%, according to LSEG data.

On the Euro front, the European Central Bank (ECB) Governing Council member Martins Kazaks said on Monday that the central bank will ease monetary policy further, though it shouldn’t do so too hastily due to lingering inflation risks. Less dovish interest rate guidance from European Central Bank (ECB) officials might help limit the Euro’s losses against the GBP.

The Eurozone HICP inflation might offer some hints about the inflation trajectory in the Eurozone and influence the ECB about the next move. The HICP is estimated to show an increase of 2.2% YoY in August, while the core HICP is forecasted to show a rise of 2.8% in the same period.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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