EUR/GBP extends breakdown after release of UK inflation data

• UK inflation data released on Wednesday quashes hopes the BoE will cut interest rates on Thursday. 
• Whilst this is bad news for UK mortgage holders the Pound Sterling rose on the news. 
• Eurozone revisions of flash estimates to its inflation showed a downwards revision, weighing on the Euro. 

EUR/GBP is trading lower on Thursday, exchanging hands in the 0.8420s as it continues falling after breaking out of the shallow channel it had been rising in since the end-of-August lows. 

The pair is down by over a quarter of a percent on the day as the Euro (EUR) loses ground against the Pound Sterling (GBP) following the release of UK inflation data early Wednesday. The data wiped out any hope of the Bank of England (BoE) cutting interest rates at its meeting on Thursday. With interest rates expected to remain elevated Sterling gained because relatively higher interest rates attract foreign investors, resulting in higher inflows of capital. 

Although headline inflation in the UK, as measured by the Consumer Price Index (CPI) remained unchanged at 2.2% in August YoY – as expected – core CPI rose above expectations, registering a 3.6% increase YoY. This was well above the 3.3% of July and the 3.5% expected. In addition, services inflation also rose, and this particular component of inflation has been a major reason holding back the BoE from cutting interest rates before. 

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

The Euro, meanwhile, experienced mild weakness after the Eurozone’s gauge of inflation, the Harmonized Index of Consumer Prices (HICP) was revised down to 0.1% MoM 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 officially data-dependent stance. Lower interest rates are negative for currencies as they attract comparatively less inflows of foreign capital.  

EUR/GBP may have lost further ground after European Central Bank (ECB) Governing Council member and Bank of France President, François Villeroy de Galhau, confirmed more cuts were on their way, saying that the “ECB is likely to continue to cut rates.”

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