EURGBP eyes more weakness towards 0.8700 as UK inflation shocks guide further rate hikes

• EURGBP is expected to decline to near 0.8700 ahead of the UK Autumn Budget release.
• The BOE needs to plan more rate hikes to safeguard the economy from inflation shocks.
• A recession situation in Eurozone would be preferable to scale down inflationary pressures.

The EURGBP pair is displaying back-and-forth moves in a narrow range of 0.8717-0.8728 in the Tokyo session. The asset is expected to continue its downside momentum after a downside break towards the round-level support at 0.8700 as a significant surge in the UK inflation rate has triggered odds of further policy tightening by the Bank of England (BOE). Also, investors are focused on the release of the UK Autumn Budget.

The headline UK Consumer Price Index (CPI) has jumped to 11.1% vs. the projection of 10.7%. A historic surge in inflationary pressures led by accelerating oil prices and a tight labor market has cleared that a peak for price growth is still ahead. The absence of exhaustion signs in the price rise index creates pressure on the Bank of England (BOE) policymakers to multiply interest rates further.

Meanwhile, the focus on UK Autumn Budget is also keeping the Euro bulls at the back foot. UK Prime Minister Rishi Sunak and Chancellor Jeremy Hunt are entitled to fill the GBP 60bln financial hole that could be achieved by sheer fiscal tightening measures. Investors are awaiting the extent of spending cuts and tax hikes to determine the scale of the decline in consumer spending.

On the Eurozone front, European Central Bank’s (ECB) policymaker Pablo Hernandez de Cos said on Wednesday that the inflation spike is proving highly persistent and has also broadened, as reported by Reuters. ECB policymaker further added that balance sheet reduction in the euro area should be very gradual and predictable. And, a recession situation would trim the inflationary pressures vigorously.