EUR/GBP fails to reclaim 0.8400 level again as hot UK CPI bolsters BoE tightening bets, geopolitics eyed

• EUR/GBP failed to hold above 0.8400 for a second successive session despite more hawkish recent ECB speak.
• The pair has pulled lower to the 0.8370s as another UK inflation surprise spurs bolsters BoE tightening bets.
• Traders are also watching Russia/Ukraine tensions, as a further increase could send EUR/GBP back under 0.8350.

EUR/GBP failed to reclaim the 0.8400 level again on Wednesday for the second time in two successive sessions, with the pair now trading down about 0.1% on the day in the 0.8370s and down about 0.3% versus earlier session highs. Another upside UK inflation surprise according to the latest ONS data released early during Wednesday’s European session has likely helped keep EUR/GBP a sell on rallies towards the 0.8400 level. The data keeps the pressure on the BoE to continue lifting interest rates in the near term.

However, concerns about longer-term UK growth as the country faces a much-publicised squeeze on incomes from April via higher taxes and energy bills, which is reflected in a UK yield curve getting ever closer to inversion, is dampening GBP’s appeal. That, combined with the increasingly hawkish lean to ECB speak from the likes of Isabel Schnabel and Francois Villeroy de Galhau in recent days is helping to prevent EUR/GBP from sliding back to test weekly lows in the 0.8350 area. Indeed, a drop to the 0.8360s attracted solid demand.

Ahead, the main driver of FX market sentiment, in general, is likely to remain geopolitics amid confusion about whether Russia is actually following through with its pledged partial withdrawal of troops from Ukraine’s border. Western/Ukrainian officials have been warning they do not see signs of de-escalation on the ground as of yet and further amping up of tensions could weigh on the euro again, sending it to fresh weekly lows under 0.8350.