EUR/GBP dips slightly as inflation risks rise in Eurozone, UK data stays mixed

EUR/GBP trades around 0.8650 on Wednesday, slightly lower on the day, as investors weigh rising inflation risks in the Eurozone against mixed macroeconomic signals from the United Kingdom (UK) and Germany.

In the Eurozone, comments from European Central Bank (ECB) officials dominate the narrative. Chief Economist Philip Lane warns that inflation readings could come in higher in March and April, pointing to a potential jump in the overall price level amid surging energy costs linked to the Middle East war. He also emphasizes the importance of monitoring price expectations and forward-looking indicators such as wages.

ECB President Christine Lagarde echoes this cautious stance, stating that the case for policy action strengthens if deviations from the inflation target become more persistent. She notes that while the pass-through from energy prices to broader inflation is usually limited, second-round effects must be closely monitored. Meanwhile, policymaker Olaf Sleijpen highlights that rising energy prices could spread more quickly through the economy than during the 2022 crisis.

At the same time, European macroeconomic data signals some deterioration in activity. Germany’s IFO Business Climate Index fell to 86.4 in March, reflecting weaker business sentiment, particularly due to a sharp decline in expectations.

In the United Kingdom (UK), annual inflation held steady at 3% in February, in line with expectations, but core inflation rose slightly to 3.2%, indicating persistent underlying price pressures, especially in services. These figures support a cautious stance from the Bank of England (BoE), as rising energy prices linked to geopolitical tensions could reignite inflation in the coming months.

Overall, the cross remains caught between a more vigilant ECB facing renewed inflation risks and a Bank of England dealing with still-elevated inflation, limiting strong directional moves in the near term.