EUR/GBP retreats as stick Eurozone inflation supports more interest rate hikes

• EUR/GBP falls back as expectations of more interest rates from the ECB threaten the economic outlook.
• Eurozone inflation expanded in August due to the hot labor market.
• Two more interest rate hikes of bps from the BoE are expected this year as investors see the interest rate peak at 5.75%.

The EUR/GBP pair falls back as a pullback move to near 0.8570 meets offers in the European session. The cross continues to bleed as investors hope that the European Central Bank (ECB) has to raise interest rates further so that inflation can be tamed and the trading bloc can avoid potential risks of a recession.

Eurozone preliminary Harmonized Index of Consumer Prices (HICP) for August expanded as the labor market remained hot, making it difficult for policymakers to convince workers to shift to slower wage growth.

Eurostat reported that monthly headline inflation expanded at a higher pace of 0.6% while investors anticipated a deflation of 0.1% as recorded for July. Core inflation that excludes volatile food and oil prices expanded at a 0.3% pace as expected by market participants. In July prices of core goods were softened by 0.1%. On an annual basis, the economic data softened to 5.3% as expected from July’s reading of 5.5%.

About the interest rate outlook, ECB policymaker Francois Villeroy de Galhau said the central bank is open to various options at the next and upcoming rate meetings. He further added keeping rates high long enough matters more than the level.

Meanwhile, the Pound Sterling remains in the driving seat as more interest rate hikes from the Bank of England (BoE) cannot be ruled out. Two more interest rate hikes of 25 basis points (bps) are expected this year as investors see the interest rate peak at 5.75%.

On the economic front, S&P Global reported the Manufacturing PMI for August at 43.0, higher than expectations and July’s reading of 42.5.