EUR/GBP consolidates around 0.8650 after UK CPI, German PPI

• EUR/GBP hovers around 0.8650 after the macro data from both economies.
• Consumer inflation eased in the UK while the German PPI revealed upbeat data.
• BoE is expected to increase interest rates by 25 basis points on Thursday.

EUR/GBP recovers from the previous day’s losses, trading near 0.8650 during the early trading hours of the European session on Wednesday. The pair gained strength after the release of downbeat inflation data from the United Kingdom (UK) and the solid figures of commodity inflation from Germany.

UK Consumer Price Index (CPI) revealed downbeat data, the year-over-year figure showed the inflation rose to 6.7% from the previous rate of 6.8%, which was expected to grow to 7.1%. CPI (MoM) improved to 0.3% compared to the 0.7% expected, which was reported a 0.4% decline previously.

While Core CPI (YoY) rose by 6.2% instead of the market expectations of 6.8%, lower than the previous growth of 6.9%.

The traders of the EUR/GBP pair anticipate that the Bank of England (BoE) will implement a 25 basis point interest rate hike during the upcoming meeting scheduled for Thursday. This potential rate increase by the BoE is seen as a proactive measure by the central bank to combat inflationary pressures and bring stability to the British economy.

However, the BoE Governor Andrew Bailey has conveyed the central bank's inclination to potentially conclude its series of interest rate hikes. This announcement, combined with apprehensions about the possibility of a recession and indications of a slowing UK labor market, could intensify the pressure on the Bank of England to pause or reconsider its ongoing cycle of interest rate increases.

On the other side, the German Producer Price Index (PPI) for the year-over-year in August reduced to the rate of 12.6% against the market consensus of 12.8%, from the previous 6% rate. While PPI (MoM) improved 0.3%, slightly higher than the 0.2% expected and swinging from the previous 1.1% decline.

The European Central Bank (ECB) raised interest rates for the 10th consecutive time in the previous week, with a 25 basis point increase, bringing its main rate to a record high level of 4%.

However, the ECB has also conveyed a clear message that the 14-month-long policy tightening cycle might have reached its peak. Furthermore, the downward revisions of CPI and GDP growth projections for the upcoming years, specifically 2024 and 2025, have reinforced the notion that additional rate hikes may not be on the immediate horizon.

Market sentiment was further influenced by the final Eurozone CPI data released on Tuesday, indicating a slowdown in inflation compared to July. This development is expected to act as a constraint on the EUR/GBP pair, as it suggests that inflationary pressures may be subsiding in the bloc.

Economists at Commerzbank have conducted an analysis of the Euro (EUR) outlook in light of the recent rate hike by the European Central Bank (ECB). Their assessment suggests that the ECB's decision to signal a halt to rate hikes for the time being aligns with market expectations.

However, this move by the ECB is not without risk, as it signifies a potentially less aggressive stance on monetary policy, which can have implications for the Euro's performance.