EUR/GBP remains below 0.8350 following Germany PPI data

EUR/GBP could face challenges due to dovish sentiment surrounding the ECB.
Germany's PPI fell by 1.4% YoY in September, extending the decline from a previous 0.8% drop.
Lower inflation prices raise the odds of the BoE implementing a total rate cut of 50 basis points by 2024.

EUR/GBP holds its position after the release of Germany's Producer Price Index (PPI), trading around 0.8330 during the early European hours on Monday. Producer prices fell by 1.4% year-on-year in September, extending the decline from a 0.8% drop in the previous two months. On a monthly basis, PPI decreased by 0.5%, marking the first decline since February. This drop exceeded expectations of a 0.2% fall and swinging from a 0.2% increase in August.

The Euro faced challenges as the European Central Bank (ECB) decided to cut its interest rates by 25 basis points last week. This could be attributed to a significant drop in inflation, which fell to 1.7% in September, now below the ECB's 2% target.

Additionally, Rabobank's research suggests that the market is interpreting recent comments from European Central Bank (ECB) officials as an indication that they are increasingly comfortable with the Eurozone's inflation outlook. This has fueled speculation about a possible faster pace of ECB easing, including the potential for a larger 50-basis-point interest rate cut.

Declines in both the Consumer Price Index (CPI) and Producer Price Index (PPI) inflation figures, along with weak labor market data in the United Kingdom (UK), are raising expectations that the Bank of England (BoE) may implement a 25 basis point (bps) interest rate cut in November, followed by another quarter-point cut in December. This could weigh on the Pound Sterling (GBP) and support the EUR/GBP cross.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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