Euro/Sterling Nears Two-Week High as UK Services Inflation Cools

Euro/Sterling held a firm tone on Wednesday, trading at 0.85742, near a two-week high. Sterling came under pressure as the latest UK inflation data showed a pullback in services price growth, further cementing market expectations that the Bank of England will hold interest rates steady in the near term, which limited the upside for the pound.

**Cooling services inflation dents BoE rate hike bets**

According to official UK data, services inflation eased from previous levels while core inflation held steady. Ruth Gregory, deputy chief UK economist at Capital Economics, noted that domestically generated inflation pressures remain manageable, and expects the Bank of England to keep rates on hold at current levels through year-end, with scope for further cuts next year. This assessment contrasts with the higher rate path implied by market pricing, undermining the pound's yield advantage. Chris Turner, analyst at ING, said that in a low-volatility environment, sterling remains supported by carry trade demand, but EUR/GBP is expected to hold near 0.8550 in the near term, with spot having already edged above that level.

**Technical breakout from recent range**

After a series of bullish candles on the 4-hour chart, the pair has broken above its recent consolidation range. The euro drew support from European Central Bank officials' remarks that inflation remains too high, with rate hike expectations providing a tailwind, while sterling lacks directional momentum amid a cooling labor market and slowing services inflation. Market data showed the UK labor market cooled further in the second quarter, with job vacancies falling to multi-year lows and like-for-like food inflation hitting its lowest level since October 2024, factors that together keep the Bank of England in a wait-and-see mode.

**Focus turns to Fed minutes**

Another market focus is the upcoming release of the July FOMC meeting minutes. Turner believes that if the minutes contain hawkish language, it could see the dollar firm slightly, but the release is not a game-changing event. The near-term direction of euro/sterling still depends on further clarity on the divergence in policy expectations between the Bank of England and the European Central Bank.