Why is the Euro weakening against the British Pound as UK CPI data strengthens expectations of an imminent BoE rate hike?

• EUR/GBP eases towards 0.8390 as Wednesday’s European session gets under way.
• Higher fuel prices push UK CPI inflation up to 3.5% YoY in September.
• France’s deteriorating fiscal outlook comes under scrutiny amid unrest.

Buying interest in the British Pound (GBP) following stronger-than-expected UK inflation puts EUR/GBP under pressure near 0.8390 in early European trading on Wednesday. For fresh direction, traders are awaiting a speech later on Wednesday by European Central Bank (ECB) President Christine Lagarde.

UK headline Consumer Price Index (CPI) inflation accelerated to 3.5% year-on-year (YoY) in September from 3.1% previously, according to Wednesday’s release from the Office for National Statistics (ONS). The reading exceeded the market consensus of 3.4%.

Excluding volatile food and energy components, core CPI inflation reached 2.8% YoY in September, up from 2.6% in the preceding reading and above the 2.7% forecast. Monthly UK CPI inflation, meanwhile, stood at 0.4% in September. Although below the previous 0.5%, it surpassed estimates of 0.3%.

Expectations of an imminent Bank of England (BoE) interest rate increase have strengthened after the September UK inflation report, lending support to GBP while weighing on the cross.

A rise in borrowing costs is widely anticipated at the BoE’s next meeting on 5 November, which would mark its first increase since 2023. According to Bloomberg, markets are also factoring in a further three rate increases over the next 12 months.

The Euro is also under pressure as protests in France deepen concerns about the country’s deteriorating fiscal outlook. In a report on Tuesday, Reuters said the French government would deploy troops to support the police and launch a major security operation ahead of further protests planned for Saturday. The government acknowledged shortcomings in its handling of the previous weekend’s violence.

Tommy von Brömsen, FX strategist at Handelsbanken, said: "The worries in France are not going away anytime soon," adding: "The bearish view on France will stay for a while longer, and there's much more euro weakness to be priced in,”

Will rising energy and food costs intensify UK inflation pressures?

The latest UK inflation figures are broadly consistent with Danske Bank analysts’ expectations. They observe that “inflation is moving broadly as we expected and, in some instances, moving slower than we thought it would,” and describe “food price momentum the one bright spot in the data” as food and non-alcoholic beverages CPI “didn’t move at 1.3% y/y.” Beneath the headline readings, however, they see more persistent price pressures, warning that “underlying inflation trends are pushing higher, with all our preferred core services metrics rising in September,”

Further ahead, the outlook for energy remains a concern for Danske Bank, which cautions that “further rises in energy prices are inevitable.” Against a backdrop of “Brent spot prices rising again,” the analysts anticipate that “further increases at the pump will hit the UK’s shores,” and warn that “gas and electricity bills will see a big jolt in January”. Their Ofgem Price Cap projections “point to a near GBP 2,100 annual dual fuel bill in the new year, with declines only likely to come in the second half of 2027.”

On food, Danske Bank restates its long-held assessment that “food price pressures would be hard to ignore for much longer.” The analysts believe that, despite “fierce supermarket competition,” “higher energy and weather-related shocks will push seasonal and processed food prices up over the next year or so.” Their overall assessment is that “today’s inflation data confirmed what we all expected: price pressures are firming and inflation remains on an upward trajectory,” with the further warning that “despite today’s uncomfortable jump in CPI, there’s more to come.”

Does Greene’s warning on stalled wage disinflation limit GBP rate-cut hopes?

Although Greene’s FXS Speechtracker score of 7.4/10 is in line with the historical average, the focus on stalled wage disinflation and increased second-round risks gives the remarks a clearly hawkish slant. By emphasising pay growth closer to 3.5% and wages still above levels compatible with 2% inflation, Greene appears to view domestic price pressures as persistent. That assessment restricts room for rapid BOE easing and offers modest support to GBP.

Demand conditions could continue to sustain inflation risks, a view reinforced by Greene’s reference to the economy’s “surprising resilience” and the observation that labour market slack may have peaked. Together, resilient activity and stubborn wage growth strengthen the case for the BOE to “proactively lean” against inflation. Markets are likely to read this as hawkish for UK interest rates and generally supportive of GBP in the near term.

Technical Analysis: Can EUR/GBP shake off bearish pressure below the 100-day SMA?

EUR/GBP retains a bearish near-term outlook on the daily chart, with spot trading below both the 20-period Bollinger middle band and the 100-day moving average. Its considerable distance below the upper Bollinger band further highlights the downside bias. Meanwhile, the Relative Strength Index (14) sits near 17, indicating deeply oversold conditions that could temper the decline without yet reversing it.

Immediate resistance on a recovery lies at 0.8485, the Bollinger middle band. Beyond that, stronger selling pressure awaits near the 100-day moving average at 0.8560 and the upper Bollinger band at 0.8612. For support, the lower Bollinger band near 0.8365 is the first level to watch. A sustained breach would clear the path for fresh lows within the broader downtrend.

(The technical analysis of this story was written with the help of an AI tool. Know more.)