EUR/GBP stays below 0.8700 following UK inflation data, Eurozone HICP eyed

• EUR/GBP maintains its position after the release of UK CPI data on Wednesday.
• UK inflation rose 3.8% YoY in August, remaining well above the Bank of England's 2% target.
• Focus shifts toward the Eurozone August HICP release and ECB President Christine Lagarde's speech later in the day.

EUR/GBP inches lower after registering gains of more than 1% in the previous session, trading around 0.8690 during the Asian hours on Wednesday. The currency cross remains subdued following the release of mixed United Kingdom (UK) inflation data. Traders will shift their focus to the final reading of the Eurozone Harmonized Index of Consumer Prices (HICP) for August data, with the ECB President Christine Lagarde expected to speak later in the day.

The UK Consumer Price Index (CPI) rose 3.8% year-over-year in August, against the expected 3.9%. However, the reading remained far from the Bank of England's (BoE) 2% inflation target. Meanwhile, the monthly inflation reached 0.3% from 0.1% prior, as expected.

The core CPI (excluding volatile food and energy items) rose 3.6% year-over-year (YoY) in the same period, compared to July's 3.8% print, while meeting the forecast of 3.6%. Services inflation dropped to 4.7% YoY in August vs. 5% in July.

The EUR/GBP cross could face challenges as the Pound Sterling (GBP) may strengthen against its peers. Signs of inflationary pressures accelerating would boost hopes that the Bank of England (BoE) will keep interest rates on hold at 4% on Thursday.

On Tuesday, Germany's ZEW Economic Sentiment Index climbed to 37.3 in September, up from 34.7 in August and well above the market forecast of 27.3. In contrast, the Current Situation Index deteriorated to -76.4, compared with -68.6 in August and expectations of -75.0. Meanwhile, the Eurozone ZEW Economic Sentiment Index ticked higher to 26.1 in September, following 25.1 in August, surpassing the consensus estimate of 20.3.

The Euro (EUR) outperformed its G10 peers after the stronger-than-expected ZEW investor sentiment data. According to Scotiabank's Chief FX Strategists, Shaun Osborne and Eric Theoret, the data are adding to the ongoing moderation in easing expectations for the European Central Bank (ECB) and helping to deliver fundamental support to the EUR via yield spreads.