EUR/GBP eyes more downside below 0.8660 as BoE sees more rate hikes, UK Inflation eyed

• EUR/GBP is expected to deliver a sheer downside below 0.8660 as BoE’s interest rate peak is far from over.
• BoE Pill remained confident that longer-term UK inflation expectations have not drifted away from the target.
• A slight decline in Eurozone’s real GDP is anticipated in the second half of the year.

The EUR/GBP pair looks vulnerable above the immediate support of 0.8660 in the Asian session. The cross is expected to discover more losses as Bank of England (BoE) Governor Andrew Bailey has made clear that current interest rates have not peaked yet. BoE Bailey reiterated that they must use the tool of interest rate rises carefully in front of the United Kingdom parliament's Treasury Select Committee (TSC).

BoE Bailey seems confident at the meeting with Treasury Select Committee that UK’s inflation will soften sharply ahead. Gas prices have already lowered by 10%, and food inflation is also losing momentum. About UK Employment, BoE Bailey said "Private sector wages are not growing faster than we thought."

On the contrary, BoE Chief Economist Huw Pill in his testimony agreed that the central misunderstood strength and persistence in UK inflation. BoE Pill said “We are trying to understand why we have made errors in inflation forecasts.” However, BoE policymaker remained confident that longer-term inflation expectations have not drifted away from the target.

Going forward, UK’s April inflation data will remain in the spotlight. As per the preliminary report, headline inflation is seen softening sharply to 8.2% from the former release of 10.1%. Core Consumer Price Index (CPI) that excludes oil and food prices impact is expected to remain steady at 6.2%.

Meanwhile, the Euro remained in action on Tuesday after mixed preliminary May PMI data. Manufacturing PMI contracted to 44.6 from the estimates of 46.2 and the former release of 45.8. While Services PMI jumped to 55.9 vs. the consensus of 55.6 but remained lower than the prior release of 56.2. Analysts at Commerzbank expect a slight decline in real GDP in the second half of the year.

In the Eurozone, European Central Bank (ECB) Vice President Luis de Guindos said on Tuesday, “The non-bank financial sector has remained largely stable in recent months, despite the stress in the banking sector that emerged in March.”