• EUR/GBP is looking for a cushion around 0.8830 as Pound Sterling is expected to remain under downward pressure.
• The European Commission has upwardly revised Eurozone’s growth forecast and has trimmed inflation projections.
• An increase in the UK’s labor cost index will create more troubles for the Bank of England.

The EUR/GBP pair is building an intermediate cushion around 0.8830 in the Tokyo session. The asset is expected to display volatile moves ahead as investors are awaiting the release of the United Kingdom employment report for January month. The cross displayed a volatility contraction on Monday despite the European Commission's (EC) revised growth forecast and inflation projections for the Eurozone.

In its quarterly publication, the EC revised the economic growth forecast to 0.9% in 2023 from 0.3% previously anticipated and is projecting an unchanged growth for CY2024 at 1.5%. While the inflation forecast for 2023 has trimmed to 5.6% YoY from the 6.1% expected earlier. The think tank sees inflation at 2.5% in 2024, down from the previous estimate of 2.6%.

Falling energy prices and easing supply-chain bottlenecks have resulted in downside projections for Eurozone inflation. However, further interest rate hikes by the European Central Bank look possible as the inflation rate is critically far from the desired rate of 2%. ECB Vice-President Luis de Guindos said on Monday, “rate increases beyond March are to depend on data,” which indicates that a 50 basis point (bps) interest rate hike by ECB President Christine Lagarde is certain.

On the economic front, the Eurozone preliminary Gross Domestic Product (GDP) for a quarterly and annual basis are expected similar to its former releases at 0.1% and 1.9% respectively. This indicates that the Eurozone economy has not seen a recession in CY2022.

Meanwhile, the Pound Sterling bulls will remain on the tenterhooks ahead of the United Kingdom employment data. The Unemployment Rate is seen unchanged at 3.7%. Investors will be laser-focused on the Average Earnings data excluding bonuses, which is expected to increase to 6.5%. This might create more troubles for the Bank of England (BoE), which is struggling to gain an upper hand in the battle against firmer inflation.

For long-term guidance on the Pound Sterling, Economists at Rabobank expect the British Pound to remain under downward pressure over the coming months. “Currently, the UK is the only G7 economy not to have recovered its pre-pandemic levels. In addition to weak growth, its fundamentals are characterized by high inflation, low productivity, weak investment growth, post-Brexit trade frictions, and a current account deficit.”