EUR/GBP jumps above 0.8570 as ECB hikes interest rates by 25 bps to 4%

• EUR/GBP has climbed to near 0.8573 as the ECB has elevated its interest rates by 25 bps to 4% as expected by the market participants.
• The ECB decided not to take the bullet and raise interest rates further despite a technical recession in the German economy.
• UK inflation is turning out to be more persistent as the labor market conditions are resilient.

The EUR/GBP pair has shown a stellar move to near 0.8573 as the European Central Bank (ECB) has hiked its interest rates by 25 basis points (bps) to 4%, as expected by the market participants. ECB President Christine Lagarde has continued its policy-tightening spell as she believes that current financial conditions are not tight enough to threaten growth prospects.

In the last meeting, ECB Lagarde confirmed that more than one interest rate hike is appropriate. Inflationary pressures in Eurozone are at 6.1% and core inflation is showing severe persistence, therefore, a hawkish stance was widely expected.

The ECB decided not to take the bullet and raise interest rates further despite a technical recession in the German economy. Also, investors are forward looking for the economic outlook of the Eurozone as the shared continent reported a contraction in the final reading of Q1 Gross Domestic Product (GDP) by 0.1%. More interest rate hikes by the ECB might weigh heavily on Eurozone’s factory activity and would propel chances of a technical recession in the Eurozone too.

On the Pound Sterling front, United Kingdom’s inflation is turning out to be more persistent as the labor market conditions are resilient. Apart from the tight labor market, food price inflation is hovering near 45-year high levels and the street is confident about a recovery in their factory activity.

All inflation-associated indicators are strengthening the need for further policy-tightening by the Bank of England (BoE). On Tuesday, BoE Governor Andrew Bailey assured that inflation will come down, but it will take longer than expected while speaking before the House of Lords Economic Affairs Committee.