EUR/GBP extends downside to near 0.8630 ahead of German inflation

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• EUR/GBP corrects significantly to near 0.8630 ahead of the German HICP data for September.
• Germany’s annual HICP inflation is seen softening despite rising energy prices.
• The UK economy is facing the headwinds of a stubborn inflation outlook and economic woes.

The EUR/GBP pair drops vertically to near 0.8630 in the European session. The asset faces selling pressure ahead of Germany’s preliminary Harmonized Index of Consumer Prices (HICP) data for September, which will be published at 12:00 GMT.

Germany’s annual HICP inflation is seen dropping sharply to 4.5% in September from 6.4% in August. The core HICP is likely to rise 0.3% in September, compared with a 0.4% acceleration in August. The headline Eurozone HICP is expected to rise 4.5% annually in September, a slowdown from August’s 5.2% increase.

Inflationary pressures in the German economy are expected to soften despite rising energy prices, which indicate a sharp slowdown in consumer spending momentum. Last week, European Central Bank (ECB) President Christine Lagarde reiterated the need for keeping interest rates sufficiently restrictive for a longer period as inflation is still high despite progress in slowdown. ECB Lagarde highlighted the risk of a tight labor market that may keep inflationary pressures intact.

Later, investors’ focus will shift to the Eurozone HICP data, which will be released on Friday.

On the Pound Sterling front, fears of a slowdown in the UK economy have deepened as the Services PMI shifted to contraction territory. Middle-class families have cut spending on services as high inflation squeezes real income.