BoE rate cut to undermine sterling, Eurozone HICP data in focus

The EURGBP currency cross holds steady near 0.8785 during early European trading on Tuesday, as traders wait on the sidelines ahead of the preliminary reading of the Harmonised Index of Consumer Prices (HICP) from the Eurozone later in the day.

Softer UK inflation, a cooling labour market, and the Autumn November budget have reinforced expectations for a December rate cut from the Bank of England.

In the budget report, Chancellor of the Exchequer Rachel Reeves announced that the government will raise taxes by GBP 26 bln by 2029-30 to fill the fiscal gap. Analysts’ projections now indicate a high likelihood of a rate reduction to 3.75% this month, which could undermine the pound sterling and act as a tailwind for the cross.

The cautious stance from the European Central Bank signals that the ECB is done cutting interest rates, providing some support to the Euro.

ECB President Christine Lagarde noted that borrowing costs are at the “right level.” Additionally, ECB Governing Council member Joachim Nagel stated that he’s comfortable with the monetary policy settings.

ECB policymakers are prepared for their last meeting of the year, with analysts expecting rates to remain unchanged for the fourth consecutive time.

The flash reading of the Eurozone HICP will take centre stage on Tuesday. The headline HICP is expected to show an increase of 2.1% YoY in November, while the core HICP is estimated to show a rise to 2.5% during the same period. If the report shows softer-than-expected inflation in the Eurozone, this could exert some selling pressure on the EUR against the GBP in the near term.

(Source: OANDA)