EUR/GBP aims to recapture 0.8700 ahead of UK Inflation

• EUR/GBP is looking to recapture the 0.8700 resistance as the focus shifts to UK inflation.
• The street is concerned over UK’s growth potential due to labor market shortages and ongoing low investment and productivity growth.
• A decline in the pace of interest rate hike to 25 bps would allow the ECB to sustainably keep pressure on inflation.

The EUR/GBP pair has rebounded sharply to 0.8695 after a wild gyration move in the early Tokyo session. The cross is looking to recapture the round-level resistance of 0.8700 ahead of the United Kingdom Inflation data, which is scheduled for Wednesday.

As per the preliminary report, the headline UK Consumer Price Index is seen at 8.3%, significantly lower than the prior release of 10.1% annually. Monthly headline CPI has shown a steady growth at 0.8%. Core CPI that excludes the impact of oil and food prices is expected to remain stable at 6.2%.

A decline in monthly UK inflation could be the outcome of lower energy prices. The UK economy has been facing the heat of labor shortages and high food inflation. A steep deceleration in UK inflation might allow the Bank of England (BoE) to pause its policy-tightening spell ahead. Investors should note that BoE Governor Andrew Bailey has already raised interest rates to 4.5%.

Analysts at Rabobank are anticipating decent gains in the EUR/GBP pair in a 9-12 month view. They believe that in that time frame, the market is likely to be focused on the prospect of looser monetary conditions from both the European Central Bank (ECB) and the BoE. Our expectation of GBP underperformance over the medium term is drawn from concerns over UK growth potential related to labor market shortages and ongoing low investment and productivity growth in the UK.”

Meanwhile, Eurozone investors are confident that more interest rate hikes will be welcomed by ECB President Christine Lagarde to tame stubborn inflation. Also, a decline in the pace of interest rate hikes from 50 basis points (bps) to 25bps might allow the ECB to sustainably keep pressure on Eurozone inflation.