Pound exchange rates volatile as UK inflation disappoints

It was another volatile day of trading for the pound on Wednesday, with the currency reversing its early losses by the end of the session following a downturn in the US dollar.

Sterling appears to be consolidating its gains this morning, with GBP/EUR flat at €1.1341 and GBP/USD stable at $1.3396, while GBP/CAD and GBP/NZD hold steady at C$1.7381 and NZ$1.9041 respectively. GBP/AUD is the only pairing currently seeing any real movement as it rises to AU$1.7730.

The euro is expected to be in the spotlight today as markets look to the European Central Bank (ECB) and whether it has begun to discuss winding down its stimulus programme, as hinted at last week.

What’s been happening?

The release of the UK’s latest consumer price index saw the pound nosedive against the majority of its peers on Wednesday as UK inflation failed to rise in line with market forecasts.

According to the Office for National Statistics (ONS), the UK’s inflation rate held at a one-year low of 2.4% in May, missing expectations it would rise to 2.5%.

The subdued inflation reading came as a major blow to Sterling sentiment as many GBP investors took it as a sign that the Bank of England (BoE) would be less likely to raise interest rates later this year.

Meanwhile the GBP/EUR exchange rate was met by heavy losses yesterday, with the UK’s weak inflation figures offsetting a sharp contraction in the Eurozone’s latest industrial production figures. 

Finally the GBP/USD exchange rate rallied on Wednesday despite the Federal Reserve delivering its second rate hike of the year and signalling that there may be two more to come.

Analysts attributed the fall in the US dollar to markets having already priced in a slightly more hawkish outlook from the Fed as well as a bout of profit taking ahead of today’s ECB meeting.

What’s coming up?

Looking ahead, the UK will release its latest retail sales figures this morning, with a sharp slowdown in sales growth potentially weakening the appeal of Sterling.

The euro is likely to steal the spotlight today however as markets brace for the outcome from the ECB’s latest policy meeting.

While a rate hike is still expected to be some way off for the bank, policymakers are expected to begin discussing its exit from its quantitative easing programme this month, with the single currency likely to surge if there are any hints this might take place by the end of 2018.

Meanwhile the US will publish its own retail sales figures this afternoon, likely lending some support to the US dollar if sales growth rises in line with expectations