EUR/GBP remains below 0.8450, downside seems limited due to less dovish ECB

• EUR/GBP may appreciate as higher Eurozone inflation has bolstered chances of the ECB adopting a cautious approach to rate cuts.
• The ECB has emphasized that inflationary pressures remain high, driven mainly by wage growth.
• The UK’s Office for Business Responsibility has raised its 2024 inflation forecast to 2.5%, up from March estimates of 2.2%.

EUR/GBP inches lower after two days of gains, trading around 0.8430 during the early European hours on Friday. This downside of the EUR/GBP cross could be limited as unexpected increase in Eurozone inflation has bolstered expectations that the European Central Bank (ECB) will maintain a cautious approach to rate cuts, steering clear of significant reductions.

The preliminary Eurozone Harmonized Index of Consumer Prices increased to 2.0% year-over-year in October, up from the previous 1.7% reading and surpassing forecasts of 1.9%. The core inflation rate held steady at 2.7% year-over-year. This rise in inflation is supported by stronger-than-anticipated economic growth, with the Eurozone economy expanding by 0.4% quarter-on-quarter in Q3, twice the growth seen in Q2 and exceeding predictions of 0.2%.

The ECB has highlighted that inflationary pressures remain elevated, primarily due to wage growth. In its recent October meeting, the ECB reaffirmed its commitment to a “data-dependent and meeting-by-meeting” strategy for future policy decisions.

The Pound Sterling (GBP) lost ground since the UK Labour government’s first budget announced £40 billion in tax hikes aimed at reducing public finance gaps and bolstering public services, as reported by CNBC.

The UK’s Office for Business Responsibility (OCR) has revised its 2024 inflation forecast upward to 2.5%, from the previous estimate of 2.2% in March. This adjustment has also led traders to anticipate fewer interest rate cuts by the Bank of England (BoE).