EUR/GBP Seeks To Regain 0.8700 In Advance Of UK Inflation Data

After a wild gyration move in the Tokyo morning session, the EUR/GBP pair has rebounded abruptly to 0.8695. The cross is attempting to reclaim the round-level resistance of 0.8700 in advance of Wednesday's United Kingdom Inflation data.

According to the preliminary report, the headline UK Consumer Price Index is anticipated to be 8.3%, which is substantially lower than the previous annual release of 10.1%. The monthly aggregate CPI has shown a consistent increase of 0.8%. The core CPI excluding the effects of oil and food prices is anticipated to remain unchanged at 6.2%.

The monthly rate of inflation in the United Kingdom could fall if energy prices fall. The economy of the United Kingdom has been suffering from labor shortages and excessive food inflation. A sharp deceleration in UK inflation could permit the Bank of England (BoE) to halt its upcoming policy tightening. Note that BoE Governor Andrew Bailey has already increased interest rates to 4.5 percent.

In a 9 to 12 month horizon, analysts at Rabobank expect the EUR/GBP exchange rate to exhibit solid gains. They believe that the market will be concentrated on the possibility of looser monetary conditions from both the European Central Bank (ECB) and the Bank of England (BoE) in that time frame. Our expectation of GBP underperformance over the medium term is based on our concerns regarding the UK's development potential due to labor market shortages and continuing low investment and productivity growth."

In the meantime, investors in the Eurozone are confident that ECB President Christine Lagarde will embrace additional interest rate hikes to combat persistent inflation. In addition, a reduction in the rate of interest rate increases from 50 basis points (bps) to 25 basis points (bps) could enable the ECB to sustainably maintain pressure on Eurozone inflation.