The euro has been surging against the British pound due to the UK’s financial problems.
But sterling was on the front foot today after German inflation soared again and we could see a further correction in the EURGBP pair.
The EUR/GBP exchange rate dropped to 0.8833 after seeing recent highs above 0.9200. Support for the euro starts at the 0.8700 level, with the 50-day moving average just below at 0.8650.
Inflation in Germany is now running faster than in the United Kingdom, and that will have alarm bells ringing for the European Central Bank. According to the latest figures, inflation hit 10.9 percent in September, which is the highest since the 1950s. The euro slumped as traders feared a recession was looming and the ECB was not moving fast enough on rates. On Friday, Eurozone inflation will be released, and it is expected to reach 9.7 percent in the economic zone.
Carsten Brzeski, economist at ING bank, told the FT that "inflation is running red hot in Germany" again, and that it was "hard to see" how another intervention by the European Central Bank would not be on the horizon. Four German economic institutions also lowered their expectations for the nation’s economic growth, expecting a recession in 2023.
"My choice would be 75 bps," ECB policymaker Gediminas Simkus said at a conference on Thursday. "But 50 is the minimum."
They now project that the economy will shrink by 0.4 percent in the year ahead, down sharply from the 3.1 percent forecast previously. Friday is a big day for the EURGBP with UK GDP figures, Italian and eurozone inflation, and German employment numbers released-traders should start there if they are seeking volatility.