EUR/GBP dives to near 0.8570 as stubborn UK Inflation dents BoE rate cut bets

• EUR/GBP tumbles to near 0.8570 as BoE rate cut bets dive after high UK inflation data.
• The BoE is less-likely to guide interest rates cut in February meeting.
• ECB Lagarge sees no victory on inflation yet until it declines in a sustainable manner.

The EUR/GBP pair has witnessed an intense sell-off as the consumer price inflation in the United Kingdom economy for December remained surprisingly stubborn. The cross has dropped to near 0.8570 and is struggling for a firm-footing due as it has provided a strong argument to Bank of England (BoE) policymakers for sticking with restrictive interest rate stance.

The UK Office for National Statistics (ONS) has reported that the headline inflation grew at a stronger pace of 0.4% after contracting 0.2% in November on a monthly basis. The annual headline Consumer Price Index (CPI) accelerated surprisingly to 4% against the former reading of 3.9%. Investors anticipated that annual price pressures will decelerate to 3.8%.

Price pressures were boosted by higher fuel prices, seasonal air fare increase and a slight increase in services inflation. A sticky inflation data has deepened fears of price pressures remaining persistent, allowing the BoE to maintain interest rates unchanged at 5.25% in its February meeting for the fourth time in a row.

Investors’ confidence for the BoE reducing interest rates from March has been faded significantly. This week, the UK ONS reported a steady labor demand and slower wage growth for three months, which improved conviction among investors that the BoE could discuss for rate cuts sooner.

Going forward, market participants will focus on the UK Retail Sales data for December, which will be published on Friday.

On the Eurozone front, European Central Bank (ECB) President Christine Lagarde see rate cuts from summer while speaking at the sidelines of the World economic Forum (WEF) annual meeting in Davos. The statement seems contradicting from other policymakers who have been reiterating the need of maintain a restrictive interest rate stance for longer.

While asked about the outlook on inflation, Lagarde said that a victory over inflation cannot be announced until it declines sustainably to 2%.