EUR/GBP finds a cushion around 0.8800 as BoE believes inflation to fall rapidly

The EUR/GBP pair has found an intermediate cushion around 0.8810 in the early Tokyo session. Earlier, the cross witnessed a sell-off after the Bank of England (BoE) announced an eleventh consecutive rate hike to sharpen its tools in the battle against double-digit inflation.  BoE Governor Andrew Bailey announced a rate hike by 25 basis points (bps) and pushed rates to 4.25%.

The asset is expected to deliver more weakness ahead as the street believes that the United Kingdom (UK) inflation is extremely stubborn and will take plenty of time to get contained. The BoE has come a long way by hiking rates to 4.25% and the annual inflation is still in the double-digit figure, showing no evidence of softening ahead.

On Wednesday, the UK Office for National Statistics reported a surprise jump in the headline Consumer Price Index (CPI) to 10.4% while the street was anticipating a decline to 9.8%. BoE stated that the surprise upside was mainly the impact of less often volatile clothing prices, which won’t last long.

The central bank is very much confident that inflation will start decelerating rapidly from the second quarter. However, the labor shortage and higher food prices might continue to keep inflation at elevated levels. For further guidance, investors will focus on the Retail Sales data, which is expected to contract by 4.7% on an annual basis.

On the Eurozone front, European Central Bank (ECB) policymaker Klaas Knot said that the ECB is unlikely to be done with rate hikes and added that they still think that they need to raise the policy rate in May. Investors should be aware that the ECB hiked rates by 50 bps last week. No doubt, more hikes must be in pipeline as ECB President Christine Lagarde has been reiterating that higher inflation would stay for a longer period.