EUR/GBP holds losses below 0.8700 ahead of UK inflation data
- EUR/GBP remains subdued as UK headline inflation is expected to rise to 3.3% YoY in March.
- Rabobank’s Jane Foley says UK politics and Labour’s election outlook may weigh on GBP sentiment.
- ECB’s Lagarde warns Eurozone outlook is highly uncertain amid enormous energy supply shock.
EUR/GBP extends its losses for the second successive day, trading around 0.8690 during the Asian hours on Wednesday. The currency cross remains subdued ahead of the United Kingdom’s (UK) March Consumer Price Index (CPI) data release. The headline inflation is expected to rise to 3.3% YoY from 3.0%, while the Core CPI is projected to remain steady at 3.2%.
On Tuesday, UK labor market data delivered a mixed picture for March. The ILO Unemployment Rate declined to 4.9%, beating the 5.2% consensus. However, the Claimant Count rose by 26.8K, exceeding the 21.4K forecast, while the 3M Employment Change slowed to 25K from 84K previously. Average Earnings Excluding Bonuses cooled down at a moderate pace to 3.6% year-on-year (YoY) against estimates of 3.5%.
Jane Foley, Senior FX Strategist at Rabobank, said that UK political uncertainty, including PM Starmer’s standing and Labour’s May election outlook, may weigh on the Pound Sterling (GBP) sentiment. Foley notes GBP’s earlier strength was driven by aggressive Bank of England (BoE) tightening bets, now scaled back, leaving the currency exposed amid persistent inflation and rate volatility.
European Central Bank (ECB) President Christine Lagarde warned the Eurozone outlook remains highly uncertain amid an enormous energy supply shock linked to Middle East tensions and the Strait of Hormuz blockade. While energy prices haven’t yet reached worst-case levels, Lagarde emphasized the outlook remains fragile.
Inflation FAQs
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%.
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.
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.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
