EUR/GBP moved modestly higher on Wednesday, trading near 0.8533 as mixed UK inflation figures weighed on the British Pound. The cross continued its recovery after falling to its lowest level in more than a year earlier this month, with investors reassessing the outlook for Bank of England policy following the latest economic data.

The UK’s Consumer Price Index (CPI) increased by 0.1% in June, matching market expectations but slowing from the 0.2% monthly rise recorded in May. On an annual basis, inflation eased to 2.6% from 2.8%, coming in below the consensus forecast of 2.7%. However, underlying price pressures remained relatively firm, with core inflation holding steady at 2.6%, slightly above expectations of 2.5%.

The inflation report followed Tuesday’s UK labor market data, which showed moderating wage growth and softer hiring activity. Together, the latest economic releases suggest that inflationary pressures are gradually easing while the labor market is losing momentum. This combination has reduced expectations that the Bank of England will raise interest rates in the near term, although persistent core inflation continues to leave the door open for further policy tightening if price pressures prove more resilient.

Adding to the inflation outlook, renewed geopolitical tensions between the United States and Iran have raised concerns over potential disruptions to oil shipments through the Strait of Hormuz. Rising energy prices could increase inflation risks globally, complicating the Bank of England’s policy decisions in the months ahead.

Analysts at BBH noted that financial markets continue to price in a full 25-basis-point Bank of England rate hike to 4.00% by November, with around 75 basis points of total tightening expected over the next year. However, they also warned that maintaining restrictive monetary policy while the UK economy remains weak could eventually force markets to scale back those expectations, limiting support for the Pound.

Meanwhile, investors are also monitoring the UK’s fiscal outlook following the appointment of Prime Minister Andy Burnham, with uncertainty surrounding future government spending plans weighing on Sterling sentiment.

In the Eurozone, attention is firmly focused on Thursday’s European Central Bank policy meeting. The ECB is widely expected to leave its Deposit Facility Rate unchanged at 2.25% after June’s rate increase, although markets continue to anticipate another hike in September as elevated energy prices keep inflation concerns alive.

Trade Idea:

Buy EUR/GBP above 0.8540, targeting 0.8600, with a stop-loss at 0.8500. Softer UK economic momentum and steady ECB expectations could support additional upside in the cross.