GBP/EUR Rate Selloff Extends on Eurozone Inflation Surprise

Image © Adobe Images

The Euro was higher against major peers after Eurozone inflation figures for June beat expectations and raised questions about the appropriateness of another European Central Bank (ECB) interest rate cut.

The Pound to Euro exchange rate fell in the minutes following news Eurozone HICP inflation rose to 2.6% y/y from 2.5%, defying expectations for a fall to 2.4%.

The odds of a September rate cut at the ECB will be increasingly questioned on the news the core measure of inflation - which is of particular concern for the ECB - stayed stuck at 2.9% for a second consecutive month, defying expectations for a fall to 2.8%.

The rise in the Euro is consistent with firming expectations that there is no need to rush further interest rate cuts at the ECB in the coming weeks.

"With underlying price pressures still high, the decision will be a close call and will depend on data to be released over the next few weeks, including the August inflation print," says Franziska Palmas, Senior Europe Economist at Capital Economics.

These inflation data come a day after the Eurozone released better-than-expected economic growth numbers for the second quarter, bolstering the argument that the economy was not in need of further stimulatory assistance from the central bank.

The fear is that cutting interest rates in a growing economy with full employment can boost inflation.

The firming of Eurozone interest rate expectations comes a day ahead of the Bank of England's interest rate decision, where a 25 basis point cut is possible.

The downside risk for Pound-Euro is that the Bank of England cuts rates and signals further rate cuts in the coming months, just as Eurozone rate cut expectations diminish. Such a drift in expectations can weigh on Pound-Euro and signal that the year's highs might be behind us.