EUR/GBP steadies as traders await BoE and ECB policy decisions amid inflation risks

EUR/GBP holds firm on Wednesday after paring earlier losses, as steady Eurozone inflation data underpins the Euro (EUR), leaving the British Pound (GBP) under modest pressure.

At the time of writing, the cross is trading around 0.8638, lacking follow-through buying and remaining confined within a one-week range as traders avoid taking large directional positions ahead of the Bank of England (BoE) and European Central Bank (ECB) policy decisions due on Thursday.

Data released by Eurostat showed that the Core Harmonized Index of Consumer Prices (HICP) rose 0.8% MoM, in line with the preliminary estimate, while the annual core rate held steady at 2.4%, matching expectations.

Meanwhile, the headline HICP increased by 0.6% on a monthly basis, also in line with the flash estimate, while the yearly rate remained unchanged at 1.9%, as expected.

With headline inflation hovering close to the ECB’s 2% target, renewed inflation risks from elevated Oil prices amid the US-Israel war with Iran could push policymakers to reassess their monetary policy stance in a more hawkish direction. However, rising energy costs pose a growing risk to the Eurozone’s economic outlook, given the region’s heavy reliance on imported energy.

The ECB is expected to leave all three key interest rates unchanged at its upcoming meeting. Attention will remain on forward guidance, as markets look for clues on the future rate path. Before the Middle East tensions erupted, markets expected the ECB to stay on hold through 2026. However, in light of renewed inflation risks from higher Oil prices, traders are now pricing in the possibility of a rate hike by July.

Meanwhile, in the UK, expectations around the Bank of England (BoE) have shifted notably, with markets now anticipating a delay in rate cuts. Earlier, traders were pricing in nearly an 80% chance of a rate cut at the upcoming meeting, but markets now expect the BoE to keep the Bank Rate unchanged at 3.75%. Investors are also increasingly pricing in the possibility of a rate hike by year-end as lingering inflation risks complicate the BoE’s easing path.