EUR/GBP aims to recapture 0.8900 as higher German Inflation solidifies hawkish ECB bets

The EUR/GBP pair is displaying a back-and-forth action around 0.8869 in the Tokyo session after a gradual correction from 0.8895. The cross is expected to resume its upside journey and reclaim the round-level resistance of 0.8900 as a surprise jump in the German Harmonized Index of Consumer Prices (HICP) has bolstered the case of a continuation of 50 basis points (bps) rate hike spree by the European Central Bank (ECB).

The preliminary German HICP (Feb) jumped to 9.3% from the estimates of 9.0% and the former release of 9.2%. The street was anticipating that lower energy prices and ease in supply chain bottlenecks will keep the Eurozone inflation in the declining territory. However, the Eurozone price index turns out stubborn and has triggered fears of more rates from the ECB ahead.

Apart from the German economy, February’s preliminary HICP numbers from Spain and France have also surprised the market participants with higher-than-anticipated figures. This shows an overall rebound in the price pressures, which indicates ECB President Christine Lagarde should be prepared for an exceptionally bumpy ride.

ECB policymaker Joachim Nagel reiterated on Wednesday that further significant rate hikes beyond March may be needed, as reported by Reuters. He further added, "Energy price drop has no essential bearing on ECB's medium-term inflation projections."

For further guidance, Eurozone HICP data will be in focus. Analysts at SocGen expect “February HICP to decelerate from 8.6% to 8.2% YoY, dragged down by energy inflation but core inflation should be up 0.2pp to 5.5% YoY and will likely stay above 3.5% this year.”

The speech from Bank of England (BoE) Governor Andrew Bailey failed to bring any action to the Pound Sterling as clear guidance on interest rates was absent.

Meanwhile, the street is not considering the novel UK-EU deal as a critical driver for the Pound Sterling. Economists at ING believe “The global risk environment and a potential narrowing in UK-Eurozone interest rate differentials are likely to prove more important drivers of Sterling than the new UK-EU deal.”