• EUR/GBP climbs near 0.8570 in early European session on Wednesday.
  • UK annual CPI rises to 2.2% in July, missing expectations of 2.3%.
  • Investors await Eurozone Q2 GDP data release today.

The EUR/GBP pair is making gains, reaching close to 0.8570 during the early European trading session on Wednesday. The British Pound weakens following the release of UK Consumer Price Index (CPI) data for July. Traders are eagerly anticipating the Eurozone Gross Domestic Product (GDP) report for the second quarter, scheduled for later today.

According to data from the Office for National Statistics, UK CPI increased by 2.2% year-on-year in July, up from 2.0% in June. This figure fell short of the market forecast of 2.3%. Additionally, Core CPI, which excludes volatile food and energy prices, rose by 3.3% year-on-year in July, below the expected 3.4%. The lower-than-expected CPI data puts pressure on the Pound Sterling as it raises expectations of a potential interest rate cut by the Bank of England in August.

Tomorrow, focus will shift to the UK GDP report for the second quarter, with a projected 1.0% year-on-year expansion. On a quarterly basis, GDP is expected to grow by 0.6% in Q2.

On the Euro side, the Eurozone GDP for Q2 will be released. The Eurozone economy is forecasted to grow by 0.3% quarter-on-quarter and 0.6% year-on-year in the second quarter. Weaker GDP numbers could weigh on the Euro and limit downside potential for EUR/GBP.

Inflation FAQs

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%.

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.

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.

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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