EUR/GBP eyes 0.8840 as stubborn Eurozone Inflation advocates a bigger rate hike from ECB

• EUR/GBP is approaching 0.8840 after sustainability above 0.8800 ahead of ECB policy.
• Credit demand in Eurozone has dropped dramatically amid higher interest rates.
• The BoE is preparing to raise interest rates further by 25 bps next week.

The EUR/GBP pair is aiming to capture the critical resistance of 0.8840 as the cross has confidently established above the round-level resistance of 0.8800 in the Asian session. The cross has attracted significant bids as stubborn Eurozone inflation is supporting a continuation of bumper interest rate hikes from the European Central Bank (ECB).

On Tuesday, the monthly preliminary Eurozone Harmonized Index of Consumer Prices (HICP) accelerated at a pace of 0.7%, which was lower than the consensus and the prior release of 0.9%. Surprisingly, annual HICP jumped to 7% vs. 6.9% as expected. Meanwhile, annual core inflation softened to 5.9% and monthly core HICP elevated at a slower pace by 1.0%.

Eurozone inflation didn’t show a significant deceleration on a broader basis led by a labor shortage, which is propelling the Employment cost index. This has bolstered the case of a bumper interest rate hike continuation from the ECB. A 50 basis point (bp) interest rate hike announcement from ECB President Christine Lagarde will push rates to 4%.

The Eurozone economy looks set for demonstrating a slowdown ahead as in a recently published Bank Lending Survey (BLS), the European Central Bank (ECB) noted that a net 38% of Eurozone banks reported a fall in demand for credit from companies in the first quarter of the year. Also, banks have tightened their credit conditions amid a volatile environment. ECB stated, "The general level of interest rates was reported to be the main driver of reduced loan demand, in an environment of monetary policy tightening."

Meanwhile, the Pound Sterling is failing to defend its downside as the United Kingdom economy is entering into a situation of higher interest rates and stubborn inflation, which would heavily impact households due to inconsistent budget against pay-off for inflation-adjusted goods and services. The Bank of England (BoE) is expected to raise interest rates further by 25 basis points (bps) next week.