EUR/GBP Plunges as UK Inflation Data Bolsters Hawkish Expectations for Bank of England

The EUR/GBP pair hit an intraday low of 0.8781 as the latest UK inflation data fueled hawkish expectations from the Bank of England (BoE) on Wednesday. The cross-currency pair experienced its largest rally in three weeks the previous day, driven by pessimism surrounding Brexit negotiations and hawkish comments from European Central Bank (ECB) officials.

February's UK Consumer Price Index (CPI) showed headline inflation rising to 10.4% YoY, surpassing market expectations of 9.8% and the previous 10.1% reading. Core CPI climbed to 6.2%, higher than the anticipated 5.8% and the previous figure. The robust inflation data may facilitate the BoE's last hawkish move on Thursday, providing support to EUR/GBP bears.

However, UK Prime Minister Rishi Sunak's Brexit deal faces skepticism from some Conservatives, the European Research Group (ERG), and the Democratic Unionist Party (DUP), which may cushion the EUR/GBP prices. The Telegraph reported that Boris Johnson will vote against Sunak's Brexit deal on Wednesday, a significant boost for Tory rebels who argue that it's not the right solution for Northern Ireland.

In other news, ECB policymaker Martins Kazaks stated on Tuesday that despite high uncertainty in financial markets, European banks are well-capitalized, and there's no reason to compare the current situation to 2008. Additionally, Spanish central bank head and ECB board member Pablo Hernandez de Cos remarked that market expectations of a 3.25% rate peak cannot be validated.

As the initial response to the UK's inflation data settles, EUR/GBP traders should monitor Brexit developments in the House of Commons and a speech from ECB President Christine Lagarde for fresh insights. Furthermore, Thursday's BoE announcements will be crucial for cross-currency pair traders, as the British central bank seems to be running out of reasons to maintain its hawkish stance.

The pound surged as much as 0.4% to $1.2270 after data revealed inflation reached 10.4% in February, exceeding all estimates in a Bloomberg survey. Core inflation climbed to 6.2% YoY, well above the median forecast of 5.7%. With banking concerns seemingly waning, the inflation report may solidify the call for another 25-basis-point hike at this week's BoE meeting, according to Antoine Bouvet, a strategist at ING Groep NV.

The UK National Statistics Office reported that consumer prices rose 10.4% in February, up from 10.1% in January, surpassing the 9.8% consensus forecast by economists polled by FactSet Research. The Consumer Price Index, including owner occupiers' housing costs (CPIH), increased by 9.2% in the 12 months to February 2023, up from 8.8% in January 2022. The pound jumped 0.4% to $1.2261 following the data release.