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• EUR/GBP declines after the release of higher-than-expected UK inflation data suggests UK interest rates could stay high. 
• “This is not what the BoE wants to see,” says TD Securities analyst. 
• Eurozone inflation data comes out in line with expectations, lifting the Euro amid dovish market expectations. 

The EUR/GBP edges lower a fraction on Wednesday to trade at about the 0.8540 level, after the release of macroeconomic data from both the UK and Eurozone. 

In the UK, inflation rose slightly higher than expected in March, according to data from the Office of National Statistics (ONS), on Wednesday. The Consumer Price Index (CPI) in March rose 3.2% year-on-year when a 3.1% rise had been expected. That said it was below the 3.6% of the previous month. 

Core CPI rose 4.2% versus the 4.1% expected reading but was also lower than the previous month. The same was true of the Retail Price Index (RPI) whilst the Producer Price Index showed results either in line with expectations or slightly below them. 

The data gave a lift to the Pound Sterling, perhaps because it reduces the probability that the Bank of England (BoE) will be able to start reducing interest rates. 

“Overall, this is not what the BoE wants to see, in particular after the stronger-than-expected wage numbers out yesterday," said analysts at TD Securities, responding to the data.  

It means the BoE may need to keep interest rates higher for longer in order to combat stickier-than-expected inflation. Higher interest rates tend to appreciate a currency as they lead to higher foreign capital inflows. 

EUR/GBP recovered some lost ground following the release of the final estimate for the March Eurozone Harmonized Index of Consumer Prices (HICP), on Wednesday. 

The data showed no change from the flash reading, which showed a 2.4% YoY rise in HICP and 2.9% in core HICP. Both readings were still below the 2.6% and 3.1% readings respectively for February. 

The Euro (EUR) may have been lifted because market expectations had overall declined in relation to Eurozone inflation. Recent dovish comments from European Central Bank (ECB) officials have suggested an increasing willingness to cut interest rates because of falling inflation and stuttering growth, and this could have been responsible for the lower outlook. 

ECB President Christine Lagarde, for example, said on Tuesday that the ECB will cut rates soon, bar a surprise and that the ECB was keeping a close eye on Oil prices due to Middle East tensions.

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