Euro ticks higher against British Pound following UK CPI data

• EUR/GBP extends its recovery to the 0.8570 area but remains below last week's highs at 0.8600.
• The Pound pulled lower against most peers as UK consumer inflation figures came in line with market expectations.
• The BOE is widely expected to leave interest rates on hold after Thursday's monetary policy meeting.

The Euro (EUR) edged up against a softer British Pound (GBP) after UK Consumer Prices Index (CPI) data revealed that inflation grew in line with market expectations in August. The EUR/GBP pair jumped about 10 pips to session highs above 0.8570, extending its recovery from lows near 0.8550 on Tuesday, but still below last week’s highs at 0.8600.

UK data released on Wednesday has shown consumer prices accelerating to a 3.1% year-on-year rate in August from 2.9% in July, while the core CPI grew 2.6% in the twelve months to August, unchanged from the previous month. These figures are in line with market expectations,

Producer prices, on the other hand, beat forecasts, as the input Producer Price Index (PPI) accelerated to 6.1% year-over-year from 4.9% in July, beating the market consensus of 5.4%. In the same vein, the Output PPI rose to 3.7% Y-o-Y from 3.1% in the previous month, well above market expectations of a 3.3% growth rate.

These figures, however, have failed to change the view that the Bank of England (BoE) will stand pat on rates on Thursday. The Monetary Policy Committee is highly expected to show divergences, but recent comments from Governor Bailey dismissing the idea that rate hikes are inevitable have dampened hopes of any immediate tightening move.

Risk aversion, high Oil prices limit Euro rallies

The Euro, however, is failing to draw any significant support from the Pound's weakness, weighed by a moderate risk-off mood and high Oil prices. Brent Oil remains steady above $100 as the situation in the Middle East complicates, which poses a serious challenge for the Eurozone’s importing economies.

Looking ahead, ING Analyst Francisco Pesole sees little room for further Euro depreciation as the balance of risks at this week’s Bank of England meeting “are actually on the dovish side.” Pesole observes that, unlike the ECB, “BoE doves will hold their ground and stress that there is no evidence price pressures are extending beyond energy prices,” limiting scope for a more hawkish shift.

“We struggle to see EUR/GBP falling much further from here,” says ING in a note, warning that “most risks appear on the upside in the coming weeks,” citing the monetary policy backdrop, “potential fiscal headlines ahead of the late October budget” and “growing pressure on Downing Street to allow independence referendums in Scotland, Wales and Northern Ireland.”