Euro trims losses against the British Pound following hot German inflation data

The Euro (EUR) has picked up from session lows against the British Pound (GBP) on Wednesday as hot German inflation figures have partially offset a mild risk-off sentiment, amid flaring tensions in the Middle East. The EUR/GBP pair ticked up to levels above 0.8540, but keeps the immediate bearish momentum intact, on retreat from last week's highs above 0.8580.

Data released on Wednesday by the German Statistics Office confirmed preliminary figures showing that the Harmonised Index of Consumer Prices (HICP) accelerated to a 2.8% year-over-year rate in July, from 2.4% in June, as energy inflation jumped to 7.3% in the 12 months to July, from 2.7% in June.

Apart from that, the Pound is faring better than the Euro, amid the growing tensions in the Middle East, where Iran-backed Houthi militants attacked an Egyptian vessel in the Red Sea, killing some of its crew members. Previously, the US Army had opened fire against a Panama-flagged cargo ship attempting to break the blockade of Iranian ports. 

These skirmishes cast further shadow on the fate of the US-Iran peace negotiations, and push oil prices higher. The barrel of Brent Oil appreciated to levels beyond $88.00 on Wednesday, about 13% up from last week’s highs, fuelling inflationary pressures across the board and adding pressure on the Eurozone’s Oil-importing economies.

UK rate expectations seen vulnerable without GDP upside surprise

The UK calendar is void on Wednesday, and investors will remain focused on the second quarter's preliminary Gross Domestic Product (GDP) release, due on Thursday, for further guidance about the Bank of England's near-term monetary policy.

Strategists at Brown Brothers Harriman note that consensus looks for “real GDP to rise 0.4% q/q vs. 0.6% in Q1,” while the BoE is even more cautious, projecting “a softer print of 0.3% q/q as lower household real income growth and tighter financial conditions weigh on domestic demand activity.”

Beyond that, the BoE “forecasts consumption growth to ease to 0.3% q/q in Q2 vs. 0.6% in Q1.” Brown Brothers Harriman warn that “absent a GDP beat, UK rate pricing looks vulnerable to a dovish repricing against the Pound”