Euro sterling exchange rate rockets higher - but the outlook is clouded by Wednesday's event risks

The euro to pound sterling (EUR/GBP) was one of the biggest winners in global FX on Tuesday as traders gave the GBP a thorough kicking in the wake of subsiding UK inflationary data.

The euro sterling is quoted as being 0.6 pct up on last night's closing level at 0.8436. [Please Note: This is a wholesale FX quote. Your bank will charge a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.]

"The pound has fallen sharply after much weaker than expected UK inflation data for October. Headline prices fell to 2.2% from 2.7% in September.  We mentioned earlier the prospect of weaker inflation pressure last month on the back of falling petrol prices, however according to the ONS it was not only transport and motor fuels that weighed on inflation but also education and tuition fees that had the largest downward pressure on prices," says Kathleen Brooks at Forex.com.

But, sterling weakness is not guaranteed

In case you were considering the euro sterling to be a one-way bet higher, we would urge caution.

Volatility has certainly increased with regards to this pair over the past 5 trading days; and the remainder of the week promises to be more of the same.

"Any weakness could be short lived as on Wednesday we get the all-important Inflation Report from the Bank of England where we expect to see growth expectations revised higher, while expectations for the unemployment rate could be revised lower. This good news could limit GBP downside today and we may see some fading of any weakness, particularly around the post CPI lows around 1.5850," says Brooks.

Nevertheless, we should be aware that technically GBP is looking a site weaker.

The GBP/USD headline rate has shifted into bear territory and this could in turn hamper euro sterling.

"All studies have shifted into sell territory and spot has broken below support, trading to a new 2‐month low. Technicals warn of further downside, with support at the 100‐day MA of 1.5677," warns Camilla Sutton at Scotiabank.

And with regards to EUR/GBP Ipek Ozkardeskaya at Swissquote Bank points out that the euro bulls could well take back control of the EUR/GBP pairing:

"EURGBP spiked to 0.8444 (50 dma) post-UK CPI announcement. The cross is back into the bullish consolidation area; the reluctance of GBP-bulls being the main catalyzer. Trend and momentum indicators continue pointing downwards suggesting a pullback into the broader downtrend channel (top at 0.8345)."