The EUR/GBP currency pair remained flat around 0.8645 during early European trading hours on Tuesday, as traders awaited the preliminary reading of the Eurozone Harmonized Index of Consumer Prices (HICP) scheduled for later in the day [1]. The upcoming inflation report is expected to provide insights into the European Central Bank’s (ECB) interest rate outlook, with headline inflation projected to rise to 3.2% year-on-year in May from 3.0% in April [1]. If the inflation data exceeds expectations, it could strengthen the Euro against the British Pound in the near term [1].
Market participants are currently pricing in a high probability—nearly 92%—of a 25 basis point interest rate hike at the ECB’s next meeting on June 11, which would raise the key deposit facility rate to 2.25%. There is also a 50% chance of an additional rate increase later this year in September, according to the ECBWatch Tool [1].
On the UK side, Bank of England (BoE) governor Andrew Bailey stated on Friday that the central bank is not in a rush to raise interest rates, citing uncertainty from the Iran war and weak UK growth rates [1]. Money market futures now imply 32 basis points of tightening this year, equivalent to one quarter-point hike, and roughly a 30% chance of a second hike, according to Reuters [1].
The Eurozone inflation data, measured by the HICP, is a key metric for the Euro. If inflation rises above the ECB’s 2% target, it typically obliges the ECB to raise interest rates to control price stability, which can benefit the Euro [1].
CONCLUSION
The EUR/GBP pair is trading flat as markets await crucial Eurozone inflation data and the ECB’s upcoming rate decision. With high expectations for a rate hike and potential for further tightening, the Euro could see upward momentum if inflation surprises to the upside. Meanwhile, the Bank of England remains cautious, reflecting ongoing economic uncertainties.