The Pound to Euro (GBP/EUR) and Sterling to Australian Dollar (GBP/AUD) exchange rates tumbled on Wednesday morning. Investors were disappointed with the latest UK inflation data amid a backdrop of Brexit negotiations.
Update: As the session continued, Sterling still remained lower against a basket of currency majors, residing around -0.23% lower against the Aussie Dollar and -0.10% weaker against the Euro.
UK Inflation Sinks, Dragging the Pound Exchange Rate Down
The UK’s inflation rate dropped from 2.7% to 2.4%, bypassing forecasts of 2.6%. Meanwhile, the core inflation rate dropped from 2.0% to 1.9%. The Pound exchange rate tumbled on the news as it alleviates some of the pressure on the Bank of England (BoE) to hike interest rates.
Global Reach Chief Economist Eimear Daly said:
‘We expect the impact of past Sterling depreciation to continue to fall out of the annual calculation, dragging CPI back towards the Bank of England’s target. However, tensions between Saudi Arabi and the US are an upside risk to our view, with recent speculation that oil could hit USD 100 per barrel if the diplomatic spat escalates. GBP immediately dropped lower against the USD on the release, due to reduced pressure of the Bank of England to hike interest rates. However, the move was partially reversed as the market awaits US Federal Reserve Minutes and the October EU Council Summit this evening. These two key risk events should keep the major crosses tied to tight ranges in the European session.’
Meanwhile, Brexit is ongoing and investors will be looking towards tonight’s dinner for signs of progress. Chief EU negotiator Michel Barnier suggested that the UK could extend its transition period for a year if the UK accepted a two-tier Irish backstop.
This morning, European Central Bank (ECB) Chief Economist Peter Praet spoke in Madrid. Although he didn’t touch much on monetary policy, he did suggest that the central bank’s forward guidance regarding interest rates and re-investment policy was effective to restore inflation to target.
Later today, the final Eurozone Consumer Price Index (CPI) readings will be out, which could influence the Euro exchange rate.
Westpac Leading Index Declines as Australian Growth Rate Slows
Meanwhile, the Westpac Leading Index was released overnight, and showed a contraction in September. The August figure was revised lower to 0.03%, while September came in at -0.06%.
Westpac research analyst Bill Evans commented:
‘Over the seven months from October last year to April this year the growth rate averaged 0.89%. In the five months since April the growth rate has averaged only 0.13% – a clear step down. Westpac expects momentum to slow to around 2.5% in the second half of 2018, which will be slightly below trend, with this slower pace to be sustained through 2019 at around trend of 2.7%.’
Thursday will see the latest Australian Employment Change and Unemployment Rate figures released. The Unemployment Rate is forecast to remain at 5.3% in September, while Employment Change is expected to show an increase of 15.0K, after August’s 44.0K.
Meanwhile, it’s a quiet end to the week for Eurozone and UK data, leaving Brexit the key factor in GBP/EUR movement.
The Pound to Euro (GBP/EUR) exchange rate is trading at levels of 1.1362. The Pound to Australian Dollar (GBP/AUD) exchange rate is trading at 1.8372.