Although inflation has been a common theme the past few months, this week in particular is volatile for the EUR/GBP. As CPI data from the UK came out and ECB members trying to talk down fragmentation in the Eurozone, there is high concern regarding interest rates. With inflation as high as 8.1%, the ECB is already pre-committed to a 25 bps hike at the July meeting. However, this opens opportunity for fragmentation which means that interest rates in some countries (the peripherals) may rise faster than in other countries (the core)
As the ECB called an emergency meeting to combat, the results are the following:
- The ECB would be flexible in allowing reinvestment redemptions on the PEPP portfolio
- To mandate a committee to help design an anti-fragmentation instrument
If the UK Retail Sales data results come out worse than expected, EUR/GBP might shoot upwards and surpass recent highs. It will be interesting to see how EUR is affected by all these factors. As well as, it is important to understand that all trading increases risk.