BoE Rate Bets Shift Amid Oil Surge

The Pound Euro (GBP/EUR) exchange rate fluctuated on Tuesday as events in the Middle East and inflation concerns infused the pairing with volatility.

DAILY RECAP:

The Euro (EUR) initially firmed on Tuesday before retreating, despite Eurozone inflation exceeding expectations.

The bloc’s latest consumer price index showed inflation rising from 1.7% to 1.9%, instead of holding at 1.7%, while core inflation also unexpectedly rose from 2.2% to 2.4%.

However, these hot inflation figures failed to support EUR. Instead, the common currency came under pressure from its strong negative correlation with the rising US Dollar (USD).

In addition, warnings from Ukrainian President Volodymyr Zelenskyy that the conflict in the Middle East could hinder Ukraine’s ability to defend itself from Russia also dented EUR demand.

Meanwhile, the Pound (GBP) initially softened against the Euro as an anxious market mood undermined the increasingly risk-sensitive UK currency.

Sterling was then able to recoup its losses, however, amid speculation that the escalating conflict in the Middle East could deter the Bank of England (BoE) from cutting interest rates too quickly.

With oil prices rising, worries that further price increases could push up UK inflation saw markets rein in their bets on another BoE rate cut. UK government yields – an indicator of interest rate expectations – surged overnight on Monday and through into Tuesday morning, while money markets indicated there is a 29% chance of a cut in March, down from 80% a week earlier.

This sharp adjustment in BoE rate cut bets helped Sterling avoid losses against the single currency.

Near-Term GBP/EUR Forecast: PMIs in Focus

Looking forward, Wednesday brings the Eurozone and UK final services PMIs for February.

A stronger reading for the UK services sector could boost the Pound against the Euro, while any revisions to the preliminary estimates are likely to have a more notable impact on GBP/EUR.

The Eurozone’s latest unemployment rate is then due out later in the morning. If unemployment held at a record low in January, as forecast, the single currency could attract some support.

Meanwhile, markets will keep an eye on events in the Middle East, which could continue to cause volatility.