EUR/GBP struggles near one-week low on softer German inflation, holds above mid-0.8800s

• EUR/GBP remains depressed for the fourth straight day and drops to over a one-week low.
• Softer-than-expected German inflation figures undermine the Euro and exert some pressure.
• Expectations the BoE is nearing the end of its rate-hiking cycle should help limit the downside.

The EUR/GBP cross turns lower for the fourth successive day on Thursday and drops to over a one-week low, around the 0.8860 region during the early part of the European session.

The shared currency's relative underperformance against its British counterpart could be attributed to the softer German consumer inflation figures. In fact, the German statistical office, Destatis reported that the Harmonised Index of Consumer Prices (HICP) dropped to 9.2% on a yearly basis in January from 9.6% in December. On a monthly basis, the HICP rose 0.5% in the first month of the year against the 1.4% expected and -1.2% prior. This, in turn, is seen as a key factor exerting some downward pressure on the EUR/GBP cross.

That said, the prospects for additional jumbo rate hikes from the European Central Bank (ECB), along with the emergence of fresh US Dollar selling, should limit losses for the Euro. In fact, the ECB policymaker Klaas Knot said on Wednesday that the central bank may extend its streak of large interest hikes into May if core inflation doesn't ease by then. Apart from this, expectations that the Bank of England rate-hiking cycle is nearing the end should lend some support to the EUR/GBP cross, warranting some caution for bearish traders.

It is worth recalling that the UK central bank removed the phrase that they would "respond forcefully, as necessary". Furthermore, BoE Governor Andrew Bailey said that inflation will fall more rapidly during the second half of 2023. This suggested that the BoE was becoming increasingly unsure as to whether further policy tightening is warranted. Hence, investors now look to the BoE's monetary policy report hearing for clues about future rate hikes, which will influence the Sterling Pound and provide a fresh impetus to the EUR/GBP cross.

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