The UK inflation data released on Wednesday had a significant impact on the financial markets, especially on the EUR/GBP pair. The data revealed that the Bank of England (BoE) will likely not cut interest rates at its upcoming meeting, which led to a rise in the Pound Sterling. This news caused the Euro to weaken, as Eurozone revisions of inflation estimates showed a downward trend, leading to speculation that the European Central Bank (ECB) may cut interest rates in the future.
The EUR/GBP pair was trading lower on Thursday, hovering around the 0.8420s range, after breaking out of a shallow rising channel it had been following since the end of August. The Euro lost ground against the Pound Sterling following the release of the UK inflation data, resulting in a downward movement of over a quarter of a percent for the pair. The increase in core CPI and services inflation in the UK raised doubts about the possibility of interest rate cuts by the BoE, leading to the strengthening of the Pound Sterling.
The rise in core CPI and services inflation in the UK indicated that the BoE is likely to hold off on any interest rate cuts at its upcoming meeting. Ruth Gregory, Deputy Chief UK Economist at Capital Economics, mentioned that the rise in services inflation suggested that the BoE would press the pause button on interest rate cuts for now, with a possible 25 basis point rate cut expected in November. This news had a positive impact on the Pound Sterling, as higher interest rates attract foreign investors, resulting in increased capital inflows.
Conversely, the Euro experienced mild weakness after the Eurozone’s inflation figures were revised downwards. The Harmonized Index of Consumer Prices (HICP) in the Eurozone was revised down to 0.1% MoM in August, lower than the 0.2% flash estimate, hinting at a potential interest rate cut by the ECB in the future. European Central Bank (ECB) Governing Council member François Villeroy de Galhau confirmed that more rate cuts were on the way, marking a shift in tone from previous statements by other ECB officials who were more cautious about the potential for rate cuts.
Overall, the release of UK inflation data had a significant impact on the financial markets, with the EUR/GBP pair trading lower as the Pound Sterling gained strength against the Euro. The possibility of no interest rate cuts by the BoE boosted the Pound Sterling, while the downward revisions to Eurozone inflation figures signaled a potential rate cut by the ECB in the future. The market will be closely watching the upcoming meetings of both central banks for further clues on their monetary policy direction.
