EUR/GBP displays a responsive buying action near 0.8750 as focus shifts to German GDP

• EUR/GBP has extended its recovery above 0.8770 ahead of German GDP data.
• UK FM Jeremy Hunt has promised to halve the double-digit inflation figure ahead.
• The ECB is expected to continue hiking interest rates by 50 bps ahead to tame stubborn inflation.

The EUR/GBP pair has demonstrated a responsive buying action after dropping to near 0.8760 in the Tokyo session. The cross has extended its gains above 0.8770 ahead of the preliminary German Gross Domestic Product (GDP) (Q4) release on Monday. Higher interest rates by the European Central Bank (ECB) have already impacted the scale of economic activities in the Eurozone. Besides, supply chain disruptions have been a significant issue for firms.

As per the consensus, the German GDP is seen stagnant against a marginal expansion of 0.4% on a quarterly basis. The labor market in Eurozone has remained tight, and the economy has also shown resilience after easing energy prices. Therefore, the street expects a shallow recession in the shared continent, not a deeper one as expected earlier.

The mega event that will trigger volatility for the Euro will be the interest rate decision by the European Central Bank (ECB). Last week, ECB Governing Council member Gabriel Makhlouf stated, "We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions," He further added, "Our future policy decisions need to continue to be data-dependent given the prevailing uncertainty," as reported by Reuters.

Meanwhile, the Pound Sterling is reacting negatively to the commentary from United Kingdom Finance Minister Jeremy Hunt. The UK FM stated Friday that the “best tax cut right now is a cut in inflation.” On paper, the UK economy is still operating with double-digit inflation and showing no signs of deceleration amid rising food prices and the labor cost index.

On the Brexit front, UK and European Union negotiators are nearing a provisional agreement on post-Brexit arrangements for Northern Ireland, putting them in touching distance of a final settlement after years of often fraught talks, as reported by Bloomberg. Bloomberg added that the two sides are dealing with intensive negotiations for weeks, and delegates are close to finding solutions at a technical level covering most pending issues including customs, state aid, and sanitary checks on agri-food goods.