Euro holds form against British Pound amid strong Eurozone data, hawkish BoE comments

• EUR/GBP stands at 0.8600 a few pips below three-month highs at 0.8607, after rallying 0.3% this week.
• The German Ifo Business Climate report beat expectations and showed a bright picture of the German economy.
• BoE's Lombardelli affirmed that the bank will have to hike interest rates if inflation remains elevated.

The Euro (EUR) holds gains against the British Pound (GBP) on Thursday, as the EUR/GBP flirts with the 0.8600 area, just below three-month highs, at 0.8607, following a 0.3% appreciation so far this week. With both currencies struggling against the US Dollar (USD), strong Eurozone data is providing some support to the common currency, offsetting hawkish comments from the Bank of England (BoE).

Data released earlier on Thursday showed that the German IFO Business Climate Index improved to 89.9 in September, from 88.8 in August, beating the market consensus, which anticipated a more moderate improvement to 89.0. In the same line, the sentiment about the current economic situation improved to 89.5 from 88.5, and the economic expectations jumped to 90.4, its highest level since February, from 89.0 in the previous month.

The IFO Institute assessed that the manufacturing index rose once more, supported by improving expectations, particularly in the electrical equipment industry, although, according to the surveyed businesses, the current situation has worsened as they complain about their order backlog. The report also warned that the crucial automotive sector is navigating "a difficult terrain." Beyond that, the services sector rose while the construction index remained largely unchanged.

BoE’s Lombardelli hints at rate hikes

In the UK, BoE’s Deputy Governor, Clare Lombardelli, struck a hawkish note, affirming that the bank will have to raise interest rates “ if elevated energy prices persist” unless there is clear evidence that economic growth is weakening.

Lombardelli also observed that wage growth remains “too high to be consistent with the inflation target” although, in her opinion, no signs of second-round effects have emerged so far. The impact of these comments on the Pound, however, has been muted.

Analysts at Brown Brothers Harriman point out that market pricing remains aggressive, with "the swaps curve continu[ing] to imply about 100bps of BoE rate hikes in the next twelve months to 4.75%." In their view, "the BoE may not need to tighten as much as markets expect," arguing that "the UK economy is already operating below capacity, the Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive."