EUR/GBP turns vulnerable near 0.8500 as BoE delivers a hawkish guidance

• EUR/GBP sees more downside below 0.8500 as the BoE chose high inflation over a poor economic outlook.
• Six out of eight BoE policymakers supported for keeping interest rates unchanged at 5.25%.
• The Eurozone HICP deflated significantly in January.

The EUR/GBP has been heavily dumped by the market participants as the Bank of England (BoE) has kept interest rates unchanged at 5.25%. The BoE was expected to leave interest rates steady for the fourth straight time, but hawkish guidance has improved the appeal for the Pound Sterling.

Out of the eight-member led Monetary Policy Committee (MPC), policymakers Jonathan Haskel and Catherine Mann voted for further quantitative tightening by 25 basis points (bps). BoE Governor Andrew Bailey has supported for keeping interest rates restrictive for a longer period until they get confident that inflation will decline to 2%. Bailey says the time period for a restrictive interest rate stance will be based on incoming data.

The outlook for the Pound Sterling has strengthened against the Euro as the BoE has chosen high inflation over deepening recession fears. According to the revised estimates of the United Kingdom Office for National Statistics (ONS), the economy witnessed a de-growth of 0.1% in the third quarter of 2023. A similar performance in the final quarter will be considered a technical recession. Also, hawkish signals would heavily impact business optimism.

On the Eurozone front, the preliminary Harmonized Index of Consumer Prices (HICP) for January softened significantly monthly. Headline and core HICP were contracted by 0.4% and 0.9% respectively. Annually, the core CPI decelerated to 3.3% from 3.4% in December but failed to match estimates of 3.2%.

Meanwhile, investors await fresh cues about when and how much the European Central Bank (ECB) will reduce interest rates in 2024. ECB President Christine Lagarde said earlier that the ‘rate-cut’ campaign could start in late Summer.