Euro ticks higher against British Pound following UK CPI data

The Euro (EUR) made slight gains against the British Pound (GBP) after the UK Consumer Prices Index (CPI) data indicated that inflation grew in line with expectations in August. The EUR/GBP pair climbed around 10 pips to a session high above 0.8570, but remained under last week's peak of 0.8600. UK figures published on Wednesday showed consumer prices surge to a 3.1% year-on-year rate in August from 2.9% in July, while core CPI rose 2.6% over the past year, unchanged from the previous month.

These figures aligned with market expectations, whereas producer prices surpassed forecasts, with the input Producer Price Index (PPI) accelerating to 6.1% year-over-year from 4.9% in July, beating the consensus of 5.4%. Output PPI also rose to 3.7% YoY from 3.1% in the prior month, well above the market's 3.3% growth rate expectation.

These developments, however, have not altered the Bank of England's (BoE) anticipated stance on rates on Thursday, as Governor Bailey's comments have quelled hopes of any immediate tightening move. The Euro struggled to gain support from the Pound's weakness, impacted by a moderate risk-off mood and rising oil prices. Brent Oil stayed above $100 due to Middle East tensions, posing a challenge for the Eurozone's import-dependent economies.

Analyst Francisco Pesole at ING predicts limited room for further Euro depreciation, as BoE doves will maintain a dovish stance, emphasizing the absence of evidence that price pressures extend beyond energy. Pesole notes that most risks seem on the upside in the coming weeks, citing the monetary policy backdrop, potential fiscal headlines ahead of the October budget, and mounting pressure on Downing Street to allow independence referendums in Scotland, Wales, and Northern Ireland.

The UK CPI, released by the Office for National Statistics monthly, gauges consumer price inflation – the rate at which the prices of goods and services bought by households increase or decrease – produced to international standards. The year-over-year reading compares prices in the reference month to the same month a year prior.

Generally, a high reading is seen as bullish for GBP, while a low reading is bearish. The BoE aims to keep inflation, measured by the headline CPI, around 2%, providing the monthly release with significance. A higher-than-expected result is typically favorable for GBP. The UK Core CPI, also released monthly by the ONS, measures consumer price inflation, excluding volatile components like food, energy, alcohol, and tobacco.

Core CPI is a crucial indicator to measure inflation and changes in purchasing trends. Like the headline CPI, a high reading is bullish for GBP, while a low reading is bearish. The BoE aims to maintain inflation, as measured by the headline CPI, around 2%, which is why the monthly release carries significance. An increase in inflation suggests an accelerated and earlier increase in interest rates or a reduction in bond-buying by the BoE, squeezing the pound's supply.

Conversely, a drop in price rise rates indicates looser monetary policy. A higher-than-expected result generally benefits GBP.