GBP/EUR exchange rate crashes below 1.19 on UK inflation, but - is this an over-reaction?
The pound to euro exchange rate is trading 0.6 pct in the red on Tuesday morning after having reached 1.1855.
The euro to pound sterling exchange rate is thus at 0.8425. The recent euro rally was reveresed on the 31st of October thanks to a similar slump in inflationary pressure in the Eurozone; drawing notable parallels to today's price action.
[Please Note: All quotes here are derived from the wholesale spot markets. Your bank will charge a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.]
As mentioned, aiding this rather dramatic slump in the UK exchange rate is some softer-than-forecast inflation data which can be found at our 09:32 entry in our live coverage.
Will the pound euro exchange rate recover?
The question now is whether today's events spell the end of the British pound's re-found strength against the euro?
We hear from a couple of analysts who today argue that this is in fact not the case; low inflation is good for the UK consumer, thus is good for the economy.
Boris Shlossberg at BK Asset Management is one commentator who is confident on the outlook for GBP, he suggests today' sell-off could well be a knee-jerk reaction:
"Cable quickly crumbled on the news breaking through the 1.5900 barrier before finding support just ahead of the 1.5850 level.
"Although the knee jerk reaction in the market was negative towards the currency, the longer term economic implications are likely to be positive for UK. If tomorrow's labor data report shows healthy employment growth, the combination of falling prices and expanding economic activity should boost the pound and the pair could move towards the 1.6000 level once again."
Impact of today's inflation data expected to be short-lived
Andy Scott at HiFX says he reckons the negative impact of today's inflation data should not weigh on GBP for too long:
"Slower price increases should help boost consumer spending if it’s maintained as individuals won’t see the same erosion of their lacklustre earnings growth, which have seen wages falling slightly in real terms over the past few years. We’ll get an updated outlook on inflation and the economy from the Bank of England tomorrow morning which should give a clearer picture on what they feel the implications the improving economic picture means for interest rates.
"Whilst in the short term this is slightly sterling negative, it is another positive overall for the economy and the impact on sterling should be fairly short lived."
Euro under pressure
Meanwhile, the euro remains under pressure against the US dollar which suggests that today's declines in GBP/EUR are a function of GBP weakness and not EUR strength.
In Europe, where growth is sclerotic, the news on the inflation front was not nearly as upbeat with German WPI reading came in at -2.7% versus 2.2% forecast, reviving fears of deflation in the region.
ECB policy makers tried to dismiss talk of deflation, but the contraction in price levels is becoming a real concern in the Eurozone and if the trend does not reverse quickly, the pressure on ECB to ease further and perhaps consider negative deposit rates is likely to increase.
The Euro fell to a 1.3358 against the US dollar in morning Frankfurt trade after a half hearted attempt to rally above the day's highs in Asia.
"The pair remains above the 1.3300 level of support, but if the eco data from the region does not improve soon, the euro could once again revisit the lows sets post ECB rate announcement," says Schlossberg.