Pound-to-Euro Forecast: GBP Hits One-Year Best As Eurozone Inflation Cools

The Pound to Euro (GBP/EUR) exchange rate climbed to its highest level in a year on Wednesday after softer-than-expected Eurozone inflation prompted investors to scale back expectations for further European Central Bank policy tightening.

At the time of writing, GBP/EUR was trading at €1.1627, up around 0.2% on the day after touching a one-year high of €1.1634.

DAILY RECAP:

The Euro (EUR) took a hit on Wednesday, after the Eurozone’s latest consumer price index dampened bets on another European Central Bank (ECB) interest rate hike.

The CPI showed headline inflation cooling more than forecast, easing from 3.2% in May to 2.8% in June, versus expectations for a reading of 3%.

In addition, core inflation surprised markets by slowing from 2.6% to 2.4%, rather than holding steady.

These softer-than-forecast figures saw markets reevaluate expectations for further ECB tightening this year, which weighed on the Euro.

Meanwhile, the Pound (GBP) rose against the Euro on Wednesday as monetary policy expectations saw traders favour Sterling over the single currency.

With markets scaling back bets on ECB interest rate hikes, the Pound was well positioned to capitalise on the movement as traders looked at UK rates more favourably.

The Bank of England (BoE) has held off raising rates so far this year, but markets do anticipate a hike could be likely in the coming months.

In addition, UK interest rates remain notably higher than those in the Eurozone, giving Sterling a relative advantage as expectations for additional ECB tightening faded.

Near-Term GBP/EUR Forecast: Central Bank Speakers in Focus

Looking forward, Thursday brings the Eurozone’s latest unemployment rate. With joblessness expected to remain relatively low in May, EUR may garner some support.

Investors may also look to speeches from ECB policymakers Piero Cipollone and Frank Elderson. If they sound uncertain about the need for further interest rate hikes following the recent inflation data, EUR could remain weak.

Meanwhile, BoE policymaker Catherine Mann is also due to deliver a speech. A cautious tone from the rate-setter could undermine GBP.