EUR/GBP struggles to gain ground above 0.8600 following UK CPI data

• EUR/GBP loses momentum to 0.8595 following stronger UK CPI data.
• The United Kingdom CPI rose 4.0% YoY in December vs. 3.9% prior, stronger than expected.
• German Economic Confidence Unexpectedly improved in January.
• The December Eurozone Harmonized Index of Consumer Prices (HICP) will be due on Wednesday.

The EUR/GBP cross drops below the 0.8600 psychological mark during the early European session on Wednesday. The downtick of the cross is backed by the upbeat December UK inflation. The cross will face the initial support level near a low of 0.8580 and a key resistance level near the 100-day Exponential Moving Averages (EMA) on the daily chart. At press time, EUR/GBP is trading at 0.8595, down 0.11% on the day.

The latest data from the Office for National Statistics on Wednesday revealed that the UK Consumer Price Index rose by 4.0% YoY in December from 3.9% in the previous reading, while the Core CPI arrived at 5.1% YoY versus 5.1% prior. Both figures came in better than market expectations. On a monthly basis, the headline CPI figure grew by 0.4% MoM in December from a 0.2% drop in November, above the consensus of a 0.2% increase. In response to the data, the Pound Sterling (GBP) attracts some buyers and acts as a headwind for the EUR/GBP cross.

On the Euro docket, German Economic Confidence Unexpectedly improved in January. The German ZEW Indicator of Economic Sentiment grew to 15.2 in January from 12.8 in December, better than the market expectation of 12.8. The current situation index dropped to -77.3 versus -77.1 prior, lower than the consensus of -77.0. Meanwhile, the ZEW survey showed that confidence in the Eurozone experienced a slight decrease in January. The figure came in at 22.7 versus 23.0 prior, better than the 21.9 estimated.

An upsurge in inflation in Germany and the Eurozone in December has no impact on monetary policy expectations. The European Central Bank (ECB) officials emphasized the uncertainty over interest rates and inflation and said they would begin cutting interest rates this spring. Nonetheless, ECB chief Mario Centeno said that a rate cut should be part of the discussion and no option should be taken off the table.

Looking ahead, the Eurozone Harmonized Index of Consumer Prices (HICP) for December will be due later on Wednesday. On Friday, investors will monitor the German Producer Price Index (PPI) and UK Retail Sales. These figures could give a clear direction to the EUR/GBP cross.