EUR/GBP sustains above 0.8800 ahead of Eurozone Inflation, ECB-BoE policy remains a key event

• EUR/GBP has managed to sustain above 0.8800 despite the expectations of a slowdown in the Eurozone HICP.
• Softening energy prices have trimmed inflation projections for Eurozone and the UK.
• The ECB and the BoE are expected to announce an interest rate hike of 50 bps.

The EUR/GBP pair has recovered sharply after a minor correction to near 0.8800 in the Asian session. The cross has scaled to near 0.8822 and is expected to refresh a three-day high above 0.8830 ahead of the release of the preliminary Eurozone Harmonized Index of Consumer Prices (HICP).

Analysts at TD Securities have come out with bold softening estimates for the headline Eurozone HICP. Analysts expect “New energy subsidies likely pulled down German headline HICP for the third consecutive month. Combined with further household support in the Netherlands and the impact of lower wholesale energy prices, this should push Eurozone headline inflation down to 8.4% YoY. While the core HICP that excludes oil and food prices is seen as steady.

This indicates that the major catalyst, which is promising a deceleration in the price index pressures is the softened energy prices.

A decline in the Eurozone HICP might not impact the interest rate decision by the European Central Bank (ECB) ahead. Considering the fact that the inflationary pressures are multi-times higher than the 2% inflation target, ECB President Christine Lagarde would stand to the expectations of a 50 basis point (bps) interest rate hike on Thursday.  

On the United Kingdom front, UK public's inflation expectations cooled off for the second straight month in January, a monthly survey conducted by Citi and YouGov. This seems to be the impact of declining energy prices, which remained a major steroid for UK inflation prior. However, Bank of England (BoE) Governor Andrew Bailey might continue hiking interest rates by 50 bps further as the road to 2% inflation is far from over. A poll from Bloomberg showed that the BoE will reach the terminal rate of 4.50% by the summer.