EUR/GBP extends downfall as UK core Inflation remains stubborn

• EUR/GBP remained vulnerable as UK core inflation turned out sticky in July.
• Eurozone’s preliminary Q2 GDP remained in line with estimates and Q1 releases.
• The ECB is expected to lift interest rates further in September.

The EUR/GBP pair continues its three-day losing streak after slipping below Tuesday’s low of 0.8574 in the London session. The cross comes under extreme pressure after United Kingdom’s inflation data for July confirmed that core inflation remained severely persistent due to stronger wage growth.

Monthly headline inflation for July contracted by 0.4% against the forecasted contraction pace of 0.5%. In June, the economic data was expanded by 0.1%. The annual headline Consumer Price Index (CPI) softened to 6.8%, as expected by investors. Firms managed to pass the benefit of lower energy prices to end consumers. Last month, Bank of England (BoE) Governor Andrew Bailey also warned fuel suppliers for overcharging customers.

The impact of a slowdown in headline inflation has been completely offset due to stickiness in core CPI. The economic data remained steady at 6.9% while investors anticipated a nominal decline to 6.8%. Core CPI is marginally lower than its peak of 7.1%, demonstrating robust demand for services and durables. Services inflation, which mostly reflects home-grown inflation pressure from wages, rose to 7.4% from 7.2%, reported Reuters.

Stickiness in core CPI has deepened the risk of long-lasting inflation in the UK economy, which will force BoE policymakers to continue its rate-tightening campaign. Also, it has created uncertainty about UK PM Rishi Sunak’s promise of halving inflation to 5%.

On the Eurozone front, preliminary Q2 Gross Domestic Product (GDP) expanded by 0.3% and 0.6% on a quarterly and an annual basis, remained in line with estimates and the January-March quarter release. Fresh payroll additions in the April-June quarter expanded at 0.2% as expected but slower than Q1’s pace of 0.6%.

About the interest rate outlook, a Bloomberg poll showed that the European Central Bank (ECB) will deliver one final hike in interest rates in September. The deposit rate will be lifted to 4% from 3.75%.