EUR/GBP rebounds from 0.8850 as ECB rate policy comes into picture

• EUR/GBP has made a recovery move from 0.8850 as the ECB is set to raise rates next week.
• Lower energy prices have decelerated Eurozone’s headline inflation while the core inflation is sticky due to labor shortage.
• UK’s new-home buyers market is getting vulnerable as interest obligations have become less affordable.

The EUR/GBP pair has witnessed some buying interest after a sideways move around 0.8850 in the Asian session. The cross is expected to remain extremely volatile as investors are shifting their focus towards the interest rate policy by the European Central Bank (ECB), which is due next week.

Investors are divided over the pace of the interest rate hike that ECB President Christine Lagarde will choose to arrest stubborn inflation. The ECB is hiking interest rates by 50 basis points (bps) and further big rate hikes could propel fears of a recession in the Eurozone. Therefore, the ECB could slow down the pace of raising interest rates.

The ECB is not expected to consider a pause in the policy-tightening spell as the tight labor market is not consistent with the mission of softening inflation to 2%. Lower energy prices have decelerated headline inflation, however, the core inflation is extremely persistent due to labor shortage.

Reuters reported that according to a Gfk Survey German consumer sentiment is set to pick up in May as moderating energy prices and expected wage increases help to dissipate households' initial fears about a loss in purchasing power.

On the Pound Sterling front, rising interest rates by the Bank of England (BoE) are creating more troubles for households. Persimmon, United Kingdom’s largest domestic property developer, said on Wednesday, the new-home buyers market is declining as higher interest rates are making interest obligations less affordable. Troubles for households are expected to expand further as BoE Governor Andrew Bailey looks set to hiking interest rates further by 25 bps to 4.5% as UK’s inflation is still stuck to the double-digit inflation range.