EUR/GBP clings to 0.8700, fades recovery ahead of EU/UK inflation data

• EUR/GBP remains sidelined after bouncing off 100-DMA on Monday.
• BOE’s commentary, UK’s political jitters weigh on GBP ahead of the key UK CPI.
• Firmer EU data, hawkish ECB speak keeps buyers hopeful.
• Risk of further upside appears minimal as BOE announces gilt operations.

EUR/GBP buyers struggle with a short-term key hurdle surrounding the 0.8700 threshold ahead of the key inflation data from the UK and the Eurozone on Thursday. In doing so, the cross-currency pair fades the week-start bounce off the 100-DMA amid mixed clues.

The UK-inspired optimism appears to fade amid a fresh political plot to topple Prime Minister Liz Truss and recall the ex-leader Boris Johnson. Even so, Reuters mentioned that British Prime Minister Liz Truss warned of tough times ahead after she scrapped her vast tax-cutting plan and said she would carry on to try to put the economy on a stronger footing, defying calls for her resignation.

Elsewhere, the Bank of England (BOE) again turned down the Financial Times (FT) news suggesting the “Old Lady”, as the UK central bank is informally known, will delay the Quantitative Tightening (QT) to wait for the gilt markets to stabilize. In doing so, the British central bank stated, per Reuters, that it would start selling some of its huge stock of British government bonds from Nov. 1 but would not sell this year any longer-duration gilts that have been in the eye of a recent storm in the British government bond market. It’s worth noting that UK’s new Chancellor Jeremy Hunt renewed the market’s optimism by reversing the unpopular “mini-budget” proposals earlier in the week.

Talking about the data, the latest updates from Reuters mentioned that the UK’s Federation of Small Businesses (FSB), a trade body, said its latest small business confidence index fell to -35.9 from -24.7, the worst reading outside of COVID-19 lockdowns.

On the other hand, numbers from the bloc were firmer and helped the regional currency amid hawkish comments from the European Central Bank (ECB) policymakers. That said, the German ZEW Economic Sentiment Index improved to -59.2 for October versus forecast of -65.7 and -61.9 previous. Further, the same gauge for Eurozone stood at -59.7 for the said period as compared to the -60.6 expected and -60.7 previous reading.

However, the European Commission’s (EC) proposal to purchase gas in bulk and cap the prices in case of extreme volatility challenges the risk appetite and the EUR amid fears of fresh Russia versus the West tussles.

Moving on, the UK and the Eurozone are both up for publishing the September month Consumer Price Index (CPI). While the old continent is expected to confirm the 10.0% HICP and CPI number, the UK CPI may rise past 9.9% prior to 10.0% and can help the GBP recover some of the latest losses.

Technical analysis

Although the 100-DMA restricts EUR/GBP downside around 0.8585, a downward-sloping resistance line from late September, near 0.8710 by the press time, appears a tough nut to crack for the bulls.