EUR/GBP flatlines near 0.8420 as hot EZ inflation fails to spur euro, but bulls recovery towards 0.8500

• EUR/GBP flatlined in the 0.8420 area on Friday as hot Eurozone inflation failed to support the euro.
• While the pair is 1.0% off earlier weekly highs above 0.8500, it's still on course to end the week 1.1% higher. 
• Evidence of growing ECB/BoE policy divergence could support a recovery in the pair next week. 

EUR/GBP flatlined in the 0.8420 area on the final trading day of the week, with the bulls still licking their wounds following Thursday’s sharp pullback from multi-month highs above the 0.8500 mark. EUR/GBP has so far been unable to benefit from recent much hotter than anticipated Eurozone inflation readings, with the YoY HICP inflation rate hitting a staggering 7.5% in March according to data out on Friday. That could be because EUR/GBP had already staged a strong rally since the start of the week prior to the release of individual EU nation HICP and then aggregate HICP inflation data in the final two days of the week.

Indeed, even though the pair is over 1.0% lower versus Thursday’s highs, it remains on course to close out the week with a gain of about 1.1%. Despite the recent correction from highs which saw EUR/GBP lose its grip on the key 200-Day Moving Average at 0.8465, central bank divergence may continue to support the pair going forward. Various ECB policymakers were on the wires on Friday warning about how further deterioration in the inflation outlook could see the central bank hasten the end of its QE programme and potential start hiking rates as soon as the end of Q3.

The increasingly hawkish tone of ECB members is in stark contrast to the increasingly dovish tone of BoE policymakers. Governor Andrew Bailey on Friday said that the BoE had seen evidence of an economic slowdown that they expect to weigh on domestically generated inflation moving forward. That comes after the BoE softened its tone at its last meeting on the need for further rate hikes in the coming quarters to tackle inflation. Amid a lack of tier one data releases out of the Eurozone or UK next week, the main focus will be on commentary from BoE and ECB policymakers and Thursday’s ECB minutes. Further evidence of divergence between the two bank’s policy stance next week could easily see EUR/GBP reverse higher again and back above the 200DMA and onto towards the 0.8500 handle.