EUR/GBP trims recent gains below 0.8450 after hotter UK CPI data

EUR/GBP pares gains to around 0.8435 in Wednesday’s early European session.
UK CPI inflation climbed to 3.5% YoY in April, hotter than expected.
ECB’s Knot said another rate cut in June cannot be ruled out.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trims recent gains near 0.8435 during the early European session on Wednesday. The Pound Sterling (GBP) edges slightly higher against the Euro (EUR) after the release of UK Consumer Price Index (CPI) inflation data for April. Later on Wednesday, the European Central Bank (ECB) policymakers are scheduled to speak, including Luis De Guindos, Phillip Lane, José Luis Escrivá.

Data released by the United Kingdom’s Office for National Statistics on Wednesday showed that the country’s headline CPI climbed 3.5% YoY in April, compared to a 2.6% rise in March. This reading came in hotter than the 3.3% expected. The core CPI, which excludes the volatile prices of food and energy, jumped 3.8% YoY in April versus 3.4% prior, above the market consensus of 3.6%.

Meanwhile, the monthly UK CPI inflation rose to 1.2% in April from 0.3% in March. Markets estimated a 1.1% reading. The Pound Sterling attracts some buyers in an immediate reaction to the hotter-than-expected UK CPI inflation data.

Traders raise their bets that the ECB will cut its interest rates further due to growing concerns over Eurozone growth. ECB Governing Council member Klaas Knot said another rate cut is possible next month, though he stressed that it’s premature to make decisions without seeing fresh quarterly forecasts.

The markets have priced in nearly a 90% possibility of an ECB rate cut on June 5, but have priced in only one additional reduction over the rest of the year, according to Reuters. This, in turn, might weigh on the Euro against the GBP in the near term.

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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