EUR/GBP declines as mixed Eurozone data contrasts with BoE policy stability

• EUR/GBP trades around 0.8610, down about 0.20% on Wednesday.
• Mixed macroeconomic data in the Eurozone limit the Euro’s fundamental appeal.
• The Pound Sterling is supported by expectations of a Bank of England policy hold.

EUR/GBP eases toward 0.8610 on Wednesday, with the cross pressured by the Euro’s (EUR) relative weakness against a Pound Sterling (GBP) supported by monetary policy expectations in the United Kingdom (UK). The latest macroeconomic indicators from the Eurozone send mixed signals and reinforce the view of a fragile economic recovery, limiting the upside potential of the single currency.

In the Eurozone, the HCOB Services Purchasing Managers Index (PMI) came in at 51.6 in January, a four-month low, below market expectations and sharply down from December. In Germany, the downward revision of the HCOB Services PMI to 52.4 confirms that activity in the region’s largest economy remains subdued. These figures highlight the fragility of the economic momentum and weigh on the fundamental appeal of the Euro.

On the inflation front, price pressures continue to ease. The Eurozone Harmonized Index of Consumer Prices (HICP) rose by 1.7% YoY in January, in line with expectations but down from 1.9% in December, while core inflation remained steady at 2.3%. According to TD Securities, this disinflation is largely driven by energy prices and is unlikely to alter the European Central Bank (ECB) stance in the near term, as this move has been widely anticipated by policymakers.

The ECB is widely expected to leave interest rates unchanged at its monetary policy announcement scheduled for Thursday.

On the UK side, the Pound Sterling is supported by expectations ahead of the upcoming Bank of England (BoE) monetary policy decision, also scheduled for Thursday. Investors expect the central bank to leave its key interest rate unchanged at 3.75%, following a 25-basis-point cut in December. Markets also anticipate guidance reaffirming a gradual path of monetary easing.

Investors will also focus on the Bank of England’s quarterly Monetary Policy Report, which will offer updated insights into inflation expectations over the next two years and the current state of the UK economy.

UK activity data remain broadly supportive. The S&P Global UK Services PMI was revised to 54 in January, slightly below the preliminary estimate of 54.3 but sharply higher than December’s 51.4, marking its highest level since August. This improvement in services sector activity provides short-term support to the Pound Sterling.