EUR/GBP Falls Below 0.8400 As Inflation Data Reduces BOE Rate Cut Bets

In early European trading on Wednesday, EUR/GBP fell to around 0.8390. Sterling (GBP) attracted some buyers following the release of the UK Consumer Price Index (CPI) for June. Traders will turn their attention to euro zone Harmonized Index of Consumer Prices (HICP) inflation data due later in the day.

Data released by the Office for National Statistics (ONS) on Wednesday showed that UK CPI increased by 2.0% year-on-year in June, compared with the previous value of 2.0%. The consensus estimate was for growth of 2.0%. Meanwhile, core CPI, which excludes volatile food and energy items, rose 3.5% year-on-year in June, the same as in May and above market expectations. On a monthly basis, UK CPI rose 0.1% month-on-month in June, compared with 0.3% in May, against expectations of 0.1%.

The CPI inflation report suggested Britain’s inflation could be firmer, prompting traders to scale back bets on a rate cut by the Bank of England in August. This, in turn, pushes GBP/USD higher and is negative for EUR/GBP. Financial markets are pricing in a U.K. interest rate cut in August to nearly 35%, down from 49% before the inflation data. Additionally, market participants still see the likelihood of a rate cut by year-end at 48 basis points, down from the previous 50 basis points.

In terms of the euro, the euro zone’s HICP is expected to grow by 0.2% month-on-month in June and 2.5% year-on-year. Finally, euro area core HICP inflation is expected to hold steady at 2.9%. A higher-than-expected inflation report from the Eurozone could support the euro and limit the downside for the cross.

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