Pound V euro: GBP flat as inflation slowdown helps consumers but cuts rate hike odds
A MINOR slowdown in the rate of UK inflation in December has provided little support for pound Sterling against the euro today.
The GBP/EUR exchange rate is stuck around opening levels at €1.124 after price growth data suggested that the pressure on household budgets eased slightly in the run-up to Christmas.
Overall price growth slowed from 3.1 per cent year-on-year to 3 per cent as expected.
Core price growth slowed from 2.7 per cent to 2.5 per cent, below expectations of a drop to 2.6 per cent.
This means that the squeeze on household incomes will soften slightly towards the end of 2017.
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We expect inflation to fall fairly sharply
Although with the latest wage growth figures clocking in at 2.3 per cent, real wages are still falling at a steady pace.
While markets are mildly reassured that consumers will likely be able to keep up the current pace of spending, there remains a long way to go before consumers are enjoying rising pay and higher levels of disposable income.
Retail Economics Chief Executive Richard Lim said: “The good news is that inflation appears to have peaked.
“We expect inflation to fall fairly sharply, to around 2.5 per cent by spring, which will ease the pressure on household budgets.”
Expert predicts pound will surge against euro in 2018
“That said, food inflation remains near four-year high and petrol prices rose sharply as the continued impact of Brexit and rising commodity prices fed through supply chains.”
However, while slowing inflation does ease the pressure on consumers, it also lowers the odds of a near-term interest rate hike from the Bank of England (BoE).
Domestic inflation data has likewise been unable to boost the euro today, as this morning’s finalised German consumer price index figures for December merely confirmed that the preliminary estimates from economists were correct.
Year-on-year consumer price growth clocked in at 1.7 per cent, while month-on-month prices grew 0.6 per cent as expected.
German wholesale price figures for December were more disappointing, with year-on-year price growth slowing from 3.3 per cent to 1.8 per cent.
While prices declined -0.3 per cent on the month against expectations of a slowdown from 0.5 per cent to 0.3 per cent.
This does not suggest sustained inflationary pressures in the Eurozone’s powerhouse economy, which has raised concerns that the next German inflation figures may do nothing to firm the case for monetary tightening from the European Central Bank (ECB).
The data calendar is empty for the remainder of the session, so the GBP/EUR exchange rate could continue to fluctuate around opening levels.
Things could pick up tomorrow following a speech from BoE official Michael Saunders; as one of the most hawkish members of the Monetary Policy Committee (MPC), he could give markets some hope if he seems optimistic about the interest rate outlook for 2018.
