EUR/GBP stays flat despite Brexit good news as US dollar volatility picks up

In US dollar volatility, EUR/GBP is sidelined as both the pound and euro rally on falling long-dated US Treasury yields and a weaker US dollar. The US dollar is driving the forex space. Despite higher wages in today's inflation data and firmer rate hike expectations in the US, the greenback has tumbled from near a one-year high on Wednesday.

At the time of writing, EUR/GBP is trading at 0.8485 and flat on the day having travelled between a narrow 0.8472 - 0.8495 range. However, from Brexit developments and UK data to the Federal Reserve minutes at the top of the hour, there is enough happening in the background across the US and UK to keep traders of the pair on their toes.

US interest rate rises eyed

Firstly, US inflation data showed prices rose solidly in September, stoking expectations the Federal Reserve will announce a tapering of stimulus next month, with the potential for rate hikes by mid-2022. The Consumer Price Index rose 0.4% last month, versus a 0.3% rise expected by economists polled by Reuters.

In the 12 months through September, the CPI increased 5.4%, up from a 5.3% year-on-year advance in August, Reuters reported. ''Excluding the volatile food and energy components, the so-called core CPI climbed 0.2% last month, up from 0.1% in August.'' Coming up, the Fed will release the minutes from its September meeting later on Wednesday and they will be parsed for signs of a November announcement that the central bank will announce a tapering of its bond-buying stimulus.

BoE tipped to be the first to raise rates

Meanwhile, the pound has edged higher on the Currency Strength Index, moving into third place behind the Aussie and Canadian dollar, commodity currencies that are stronger on the inflation hedge. Earlier, traders assessed data showing the British economy grew slightly below consensus in August. However, the sentiment is that was not enough to dent expectations the Bank of England (BoE) will increase rates. Britain's economy grew 0.4% in August, leaving it just 0.8% smaller than it was in February 2020, the Office for National Statistics said. Economists polled by Reuters had forecast monthly gross domestic product growth of 0.5% for August.

One of the major driving forces behind the pound is the expectation that the BoE will be the first major central bank to raise interest rates since the beginning of the pandemic. Investors are betting on a rise to 0.15% by December. GBP/USD had rallied to a two-week high of 1.3674 on Monday due to weekend headlines that quoted key members of the BoE, including the governor of the central bank, Andrew Bailey, and fellow policymaker, Michael Saunders, who both warned of inflationary risks and the need to act. Sanders warned that households must brace for "significantly earlier" interest rate rises. Bailey stressed the need to prevent inflation from becoming permanently embedded.

Brexit turns a significant corner

In other positive news for the pound, Brexit headlines have been coming in on Wednesday with updates from Brussels that plans to dramatically reduce checks on goods entering the region in a bid to end nearly two years of wrangling.

However, one key sticking point remains – UK Brexit Minister Lord Frost’s demand to rewrite the Protocol to at least dilute the role of the European Court of Justice (ECJ) in overseeing the rules. If Lord Frost does not back down on this, an EU official said it will be “a very big gap between the ideas we are putting on the table today and what the UK Government is asking for.''