EUR/GBP: a forecast ahead of this week's UK inflation figures

EUR/GBP has been trading with a low tone for several days now after the Bank of England's wave of communication triggered a rally. Will the pair give back its recent gains after the release of UK inflation data this week?

The EUR/GBP cross recently jumped from its yearly lows as the Bank of England disappointedly failed to deliver on its promises. Last month, central banks hinted that they would not tolerate higher inflation and market participants interpreted that a rate hike would come sooner than expected. As such, the British pound traded with a bid tone for the days leading up to the Bank of England's decision.

But the bank did not raise rates and instead delivered a conciliatory message. What followed was a massive sell-off in the pound, and the EUR/GBP cross was just one of the pound pairs that reflected the weakness - it went from 0.84 to 0.86.

However, now that the Bank of England's decision is behind us, inflation data is about to be released later this week. The market expects year-over-year CPI to be 3.8% and core CPI to be 3.1%. Based on the trend of inflation in the developed world, the risk is on the upside and therefore inflation may rise more than expected. Therefore, the Bank of England may come under further pressure to act, if inflation continues to rise.

The series of lower highs and lows suggests more downside

Bullish bets have increased considerably since the Bank of England's decision, but the technical situation remains bearish as long as the series of lower highs and lows remain in place. The 0.8650 area is crucial for EUR/GBP buyers, as a daily close above the level would invalidate the series and the overall bias would turn bullish. However, the bears appear to be in control until then, and a drop below 0.85 should put further pressure on the cross.

From a fundamental standpoint, the euro looks weak heading into the winter season. Rising energy prices and its dependence on Russian gas could weigh on European economies in the coming months. In addition, some European countries have already imposed harsh and unfair new virus-related restrictions, putting further pressure on the common currency.

Overall, the EUR/GBP cross is far from bullish. Unless we see a daily close above 0.8650, the bias is that a new low below 0.84 is in the cards.