EUR/GBP extends breakdown after UK inflation data release

• UK inflation data released on Wednesday dashes hopes that the BoE will cut interest rates on Thursday.
• While this is bad news for UK mortgage holders, the pound rose on the news.
• Eurozone revisions to its flash inflation estimates showed a downward revision, weighing on the euro.

EUR/GBP is trading lower on Thursday, changing hands in the 0.8420s as it continues to decline after breaking out of the shallow channel it has been rising in since the late August lows.

The pair is down more than a quarter of a percent on the day as the euro (EUR) loses ground against the British pound (GBP) following the release of UK inflation data early Wednesday. The data dashed any hope that the Bank of England (BoE) would cut interest rates at its meeting on Thursday. Interest rates are expected to remain high, with sterling gaining as relatively higher interest rates attract foreign investors, resulting in higher capital inflows.

Although headline UK inflation as measured by the Consumer Price Index (CPI) was unchanged at 2.2% in August – as expected – the core CPI rose more than expected to rise 3.6% compared to last year. That was well above July’s 3.3% and the 3.5% expected. In addition, services inflation has also picked up, and this particular component of inflation has been a major reason preventing the BoE from cutting interest rates ahead.

“…but the rise in services inflation of 5.2% to 5.6% suggests the Bank of England will almost certainly hit the pause button on interest rate cuts on Thursday. We continue to expect the next rate cut of 25 basis points to take place in November,” said Ruth Gregory, deputy chief UK economist at Capital Economics.

The euro, meanwhile, saw slight weakness after the eurozone’s gauge of inflation, the Harmonized Index of Consumer Prices (HICP), was revised down to 0.1% month-on-month in August from a flash estimate of 0, 2%, when no change was expected. Lower inflation suggests the European Central Bank (ECB) will be more likely to cut interest rates in the future, given its official data-dependent stance. Lower interest rates are negative for currencies because they attract comparatively less foreign capital inflows.

EUR/GBP may have lost further ground after François Villeroy de Galhau, a member of the European Central Bank (ECB) Board of Governors and president of the Banque de France, confirmed that more cuts are on the way, saying that “it is the ECB may continue to cut rates. “

His comments mark a change in tone and follow more cautious statements by colleagues. Gediminas Šimkus, a member of the ECB Governing Council, said on Tuesday that “the likelihood of an interest rate cut in October is very low”. His colleague, the ECB’s chief economist, Philip Lane, said on Monday that the ECB should retain discretion over the speed of policy adjustments and added that wages were rising “as expected” and were likely to “remain high and volatile”. in the second half of 2024, indicating he expected inflation to remain relatively high over the period and therefore advocates a cautious approach to cutting interest rates.