Why has the Pound fallen vs the Euro?

The Pound’s bullish run came to an end this morning when the UK released it’s latest inflation numbers at 09:30am. Inflation came in at it’s lowest in a year after falling much more than expected. This, coupled with the strong wage growth figures yesterday, and it’s now much less likely that the Bank of England will raise interest rates, and this has weakened the Pound as you can see from the GBPEUR chart below:

GBPEUR24

Inflation, Interest Rates, and the effect on the value of Sterling

The Pound had been really gaining strength due to decent economic data. Markets had been expecting another interest rate hike next month, and the prospect of higher rates strengthens a currency due to the higher return on offer. The BoE’s inflation target is 2%, and  as it’s been running higher than this, many expected the BoE to act. The only thing holding them back is the fact that wages had been growing at less than inflation, meaning incomes were being squeezed.

Yesterday showed that wages are now outpacing inflation, and this would have meant rates going up, and GBP/EUR was about the €1.16 level as a result. However, it now looks like inflation is coming back down, and this means rates are likely to be left at 0.5% next month. Markets had been ‘pricing in’ a hike, and now this is less likely, we’re seeing a correction in the value of the Pound. This is why Sterling has fallen this morning.

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