Euro/Pound: Awaiting a Catalyst as UK CPI and ECB Loom

The Euro/Pound has been trading in a narrow range recently, but this could soon change as two major events unfold this week: the UK’s Consumer Price Index (CPI) report on Wednesday and the European Central Bank’s (ECB) meeting on Thursday. These events are expected to provide the much-needed catalyst for the pair to break out of its current sideways action.

UK inflation data, particularly from the services sector, is key to the Bank of England’s next move. Governor Andrew Bailey has hinted that the Bank could take a more aggressive approach if inflation data softens. Market consensus expects UK services CPI to drop back to 5.3% year-on-year. Should we see the print come in at 5.1% or lower it would give the BoE room to start easing.. A weaker inflation print could lead to further pound weakness, especially against the euro.

On the other hand, the ECB’s stance could provide a tailwind for the euro. If the central bank takes a more hawkish tone during Thursday’s meeting, the euro could gain additional strength, especially if it signals that rate cuts are not on the near-term horizon. This creates a favorable setup for EUR/GBP longs, especially if the pair holds support at 0.8350, as traders look to retest the recent high of 0.8500

ING note that the UK investment summit might generate some short-term headlines, but that it’s unlikely to have a lasting impact on sterling. Instead, the focus will shift to UK Chancellor Rachel Reeves’ first budget on October 30, which could be pivotal for the UK’s economic outlook. But for now, it’s the CPI report that will dictate short-term pound movements.

In conclusion, this week’s UK jobs and inflation data could heavily influence the Bank of England’s rate outlook and, by extension, sterling’s performance. As traders await these pivotal moments, a EUR/GBP long could be the more favourable play. However, it’s important to watch for any surprises from the ECB or the inflation data. The pair is primed for a breakout, and the direction will soon become clear.