EUR/GBP aims to surpass 0.8700 as ECB Lagarde sees inflation too high for so long

• EUR/GBP eyes fresh upside above 0.8700 as ECB Lagarde sees inflation risks skewed upside.
• Eurozone’s headline and core inflation are seen softening to 4.5% and 4.8% respectively.
• The BoE unexpectedly paused interest rate hikes last week amid potential slowdown risks.

The EUR/GBP pair gathers strength to surpass the immediate resistance of 0.8700 in the late European session. More upside is anticipated in the cross as European Central Bank (ECB) President Christine Lagarde said that despite progress on inflation it is seen as too high for too long as the labor market has so far remained resilient.

This week, investors will focus on the Eurozone preliminary Harmonized Index of Consumer Prices (HICP) for September, which will be published later this week. The headline and core inflation are seen softening to 4.5% and 4.8% respectively.

The asset has been consistently moving higher for the past three trading sessions as the Bank of England (BOE) surprisingly paused the policy-tightening spell on Thursday while investors anticipated an interest rate hike by 25 basis points (bps).

BoE Governor Andrew Bailey skipped hiking interest rates after raising them consecutively for 14 times as higher interest rates have dampened the economic outlook. Labor demand has slowed as firms are focusing on achieving higher efficiency through controlling costs. Like Manufacturing PMI, Services PMI also landed below the 50.0 threshold consecutively for the second month, as per the preliminary S&P Global PMI report for September.

With a pause in the historically aggressive rate-tightening cycle by the BoE, the risks of a rebound in inflation and a slowdown in the growth rate have skewed to the upside. BoE policymakers came out with weak guidance on the Q3 Gross Domestic Product (GDP). The BoE conveyed that Q3 GDP now is expected to rise by a meager 0.1% (Aug: +0.4%), with underlying growth in H2 2023 likely weaker than forecast in August.