Euro gathers strength against British Pound after UK June CPI inflation falls by more than expected

EUR/GBP holds positive ground around 0.8525 in Wednesday’s early European session.
UK CPI inflation fell by more than expected to 2.6% in June.
Markets price in two ECB rate hikes by early 2027 on inflation concerns.

Lallalit Srijandorn FXStreet

The EUR/GBP cross gains momentum to near 0.8525 during the early European trading hours on Wednesday. The British Pound (GBP) weakens against the Euro (EUR) following the UK inflation report. All eyes will be on the European Central Bank (ECB) interest rate decision later on Thursday.

Data released by the Office for National Statistics (ONS) on Wednesday showed that the UK headline Consumer Price Index (CPI) rose 2.6% YoY in June, compared to a rise of 2.8% in May. This figure came in softer than the market expectations of 2.7% growth.

Meanwhile, the core CPI, excluding volatile food and energy items, climbed 2.6% YoY in June, versus 2.6% prior, hotter than the forecast of 2.5%. On a monthly basis, UK CPI inflation eased to 0.1% in June, down from 0.2% in May, in line with the market consensus.

The British Pound attracts some sellers in an immediate reaction to the UK CPI inflation report, as concerns that the Bank of England (BoE) could increase interest rates later this month were expected to ease.

On the Euro front, traders widely expect the ECB to leave the interest rates unchanged at its upcoming July policy meeting on Thursday, while avoiding commitments on the future course of interest rates. However, markets fully priced two additional ECB rate hikes by early 2027, according to Reuters.

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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