EUR/GBP advances towards 0.8640 despite soaring hawkish BOE bets

• EUR/GBP is marching towards 0.8640 as higher headline HICP has accelerated hawkish ECB bets.
• A 75 bps rate hike by the BOE would be the highest in the current cycle.
• The synergy of higher tax and spending cuts is needed to combat the debt crisis.

The EUR/GBP pair is looking to extend its recovery above the immediate hurdle of 0.8625 in the Tokyo session. The cross rebounded firmly on Monday after defending the critical support of 0.8574. The asset is being favored by long investors as UK’s novel leadership-infused optimism has faded away.

The appointment of Rishi Sunak as UK Prime Minister, the fifth leader in the past six years, brought short-term stability to UK bonds markets. The synergy of UK PM Rishi Sunak and Chancellor Jeremy Hunt is responsible for curtailing the debt mess in a highly-inflated environment.

To bring down the pile of debt, the administration is focusing on tightening the fiscal policy measures through spending cuts and levying higher tax obligations on the general public.

In an article written by Financial Times on Monday, Treasury insiders said that Sunak and Chancellor Jeremy Hunt had agreed that “those with the broadest shoulders should be asked to bear the greatest burden”, and everybody’s taxes would go up. They further added that the administration believes that the fiscal hole in the economy led by minting money to fight against Covid-19 and to support households against energy bills is needed to be filled. And, spending cuts seldom cannot fulfill the fiscal hole.

On the monetary policy front, Bank of England (BOE) Governor Andrew Bailey is set to tighten policy further to bring down the inflationary pressures. Analysts at Rabobank have come forward with a 75 basis point (bps) rate hike projection. This would be the largest rate hike in the current cycle.

Meanwhile, Euro investors are projecting more rate hike measures from the European Central Bank (ECB) as the headline Harmonized Index of Consumer Prices (HICP) has soared to 10.7% vs. the projections of 10.2%. Price pressures have climbed to the rooftop and more rate hikes are needed to contain the inflation mess.