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

• EUR/GBP trims earlier losses but remains in negative territory on Wednesday.
• Focus turns to the BoE and ECB monetary policy announcements on Thursday.
• Rising Oil prices fuel inflation concerns, shifting central bank interest rate expectations.

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, unchanged from January, while the annual core rate held steady at 2.4%, in line with market expectations.

Meanwhile, the headline HICP increased by 0.6% on a monthly basis, slightly below the 0.7% recorded in January, while the yearly rate remained unchanged at 1.9%, matching forecasts.

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.