Pound Falls as UK Inflation Rises, GBP/EUR Tests 1.1650

The Pound to Euro exchange rate fell on Wednesday, despite a rise in UK headline inflation. The GBP/EUR pair traded around 1.1652 during the evening session, down approximately 0.36% on the day and at its weakest levels of August. Sterling received little lasting support from the inflation figures, while the Euro maintained a firm tone following stronger German sentiment data.

UK consumer-price inflation increased to 2.9% in July, driven primarily by a 13% increase in the household energy price cap. The increase was slightly above the Bank of England's 2.8% projection. Core inflation remained unchanged at 2.6%, and services inflation eased to 3.4%. These figures did little to strengthen the argument for an immediate Bank of England rate hike.

The combination of a cooling labour market, contained underlying inflation, and a firmer Euro leaves GBP/EUR vulnerable to further downside. The UK gilt market will remain important, particularly if higher energy prices or fiscal concerns push long-term yields higher.