EUR/GBP maintains strength despite BoE pushing interest rates by 25 bps to 5.25%

The EUR/GBP pair tests the resistance of 0.8650 as the Bank of England (BoE) maintains a hawkish stance in its August monetary policy. BoE policymakers elevate interest rates by 25 basis points (bps) to 5.25%. Nine-member-led-BoE Monetary Policy Committee (MPC) shows a majority towards an interest rate hike while policymaker Swati Dhingra supports an unchanged interest rate decision.

Inflationary pressures in the United Kingdom economy are highest in comparison with other G7 economies due to labor shortages, high food inflation, and resilience in consumer spending. And, a continuation of the policy-tightening spell was highly expected by the market participants.

One league of investors was expecting that the BoE will raise interest rates consecutively by 50 bps as inflation is almost four times the desired rate of 2%. UK PM Rishi Sunak promised a decline in inflation to at least 5% by year-end and for that fat rate hikes are warranted.

In a monetary policy statement, BoE Governor Andrew Bailey conveyed BoE reiterated that it will ensure that the bank rate will stay "sufficiently restrictive for sufficiently long" to return to the inflation target.

Meanwhile, the Euro remains solid as inflationary pressures in Eurozone are softening. Headline and core inflation in July deflated by 0.1% on a monthly and prices of products at factory gates are declining as firms are passing the benefit of lower input prices to end consumers.

In spite of easing price pressures fears of more interest rate hikes from the European Central Bank (ECB) are still elevated as a victory against inflation is not announced yet.