Euro trims gains against British Pound after UK CPI inflation rises to 2.9%
- EUR/GBP trims gains near 0.8555 in Wednesday’s early European session.
- UK CPI inflation jumped to 2.9% YoY in July, the highest rate for four months.
- ECB’s Lane said 3% Eurozone inflation remains too high.
The EUR/GBP cross pares gains around 0.8555 during the early European trading hours on Wednesday. The British Pound (GBP) attracts some buyers against the Euro (EUR) following the UK inflation data. The European Central Bank (ECB) President Christine Lagarde’s is scheduled to speak later on Wednesday.
Data released by the Office for National Statistics (ONS) on Wednesday showed that the UK headline Consumer Price Index (CPI) inflation climbed to 2.9% YoY in July from 2.6% in June. This figure came in line with the market expectations of 2.9%. The ONS said that it was driven by a "sharp increase" in gas prices following a rise in the household energy price cap.
Meanwhile, the core CPI, which excludes volatile food and energy items, rose 2.6% YoY in July, versus 2.6% prior, hotter than the forecast of 2.5%. On a monthly basis, the headline CPI rose 0.3% in July, compared to an increase of 0.1% in June, in line with the market consensus of 0.3%.
Money market pricing shows City economists project one Bank of England (BoE) rate hike by the end of the year, which would lift the Bank rate from 3.75% to 4.0%.
On the Eurozone front, ECB chief economist Philip Lane said Tuesday that Eurozone inflation at 3% remains too high despite appearing modest compared to previous levels. Markets are now pricing in a continuation of the ECB hiking cycle. The ECB Watch Tool indicates a 90% to 94% odds of a 25 basis points (bps) hike to 2.50% at the September policy meeting.
BoE expectations hold firm despite softer UK labour signals
Strategists at Scotiabank note that the weaker UK labour figures have done little to shift the policy outlook, with the “soft data [having] little impact on near-term BoE pricing (just 5bps of tightening risk reflected in Sep swaps)” and instead reinforcing the view that “market pricing for one more hike before year-end remains stretch.”
Technical Analysis: EUR/GBP
In the daily chart, EUR/GBP keeps a mildly bearish bias as spot holds beneath the 20-day simple moving average of the Bollinger Bands and well below the 100-day simple moving average. Price is situated between the lower and middle Bollinger bands, suggesting a capped recovery tone, while the 14-day Relative Strength Index around 50 signals neutral momentum that neither challenges nor offsets the prevailing downside structural pressure.
On the topside, initial resistance emerges at the Bollinger middle band near 0.8555, followed by the upper Bollinger band around 0.8580, ahead of the more meaningful barrier at the 100-day SMA clustered near 0.8620. On the downside, the lower Bollinger band at 0.8532 forms immediate support, and a clear break beneath this floor would likely open the way to a deeper retreat in the cross.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
