EUR/GBP reverses UK CPI-inspired losses, flat-lines around mid-0.8500s

• EUR/GBP meets with some supply following the release of a stronger UK CPI report.
• The data lifts bets for more aggressive BoE rate hikes and boosts the British Pound.
• The ECB’s hawkish outlook helps limit the downside ahead of the BoE on Thursday.

The EUR/GBP cross comes under some selling pressure following the release of the latest UK consumer inflation figures on Wednesday and drops to a fresh daily low during the early European session. Spot prices, however, manage to recover a few pips in the last hour and currently trade with only modest intraday losses, around mid-0.8500s.

The UK Office for National Statistics (ONS) reported that the headline UK CPI increased by 0.7% in May and the yearly rate held steady at 8.7% as compared to consensus estimates for a modest fall to 8.4%. Furthermore, core inflation, which excludes volatile energy, food, alcohol and tobacco prices, accelerated from 6.8% in April to the 7.1% YoY pace during the reported month, or the highest rate since March 1992. This, in turn, reaffirms market bets for a further policy tightening by the Bank of England (BoE), which, in turn, provides a goodish lift to the British Pound and exerts some downward pressure on the EUR/GBP cross.

In fact, the markets are now pricing in a greater chance of a jumbo 50 bps BoE rate hike on Thursday. Moreover, sticky inflation and a persistently tight labor market have forced investors to increase their forecast for peak interest rates to 6.01% by February 2024. The immediate market reaction, however, remains limited as traders now seem reluctant to place aggressive bets and prefer to move to the sidelines heading into the key central bank event risk. Apart from this, a modest US Dollar (USD) strength caps the Sterling, which, along with the European Central Bank's (ECB) hawkish outlook, limits losses for the EUR/GBP cross.

It is worth recalling that the ECB hiked interest rates for the eighth straight time last Wednesday, by 25 bps to 3.5% or the highest in 22 years and signalled that additional rate hikes will be needed to bring Eurozone inflation to its medium-term target of 2%. In the accompanying policy statement, the ECB raised its inflation projection for this year to 5.1% from 4.6%, suggesting that the central bank is still not done with its policy tightening, which, in turn, is seen lending some support to the shared currency. That said, the aforementioned fundamental backdrop supports prospects for a further depreciating move for the EUR/GBP cross.

Technical levels to watch