EUR/GBP bears lapping up UK rate hike expectations, testing daily support

  • EUR/GBP is falling into daily support and offered from both weekly and hourly resistance.
  • Bears are fuelled by higher GB rates expectations and weaker German data.

Besides a weaker US dollar, EUR/GBP is in the hand of the bears on Thursday following a strong offer in the UK bond market following higher rate expectations, in stark contrast to the earlier question as to whether UK rates would go negative. 

First and foremost, the pound has recovered from 10-day lows which were made when the markets got behind the greenback on Wednesday following hawkish comments from a top Federal Reserve official and traders preparing for inflation data this Friday.

It should be noted, however, that the pound has been the second best-performing G10 currency versus the dollar this year, up 3.3% year-to-date.

Investors are backing the pound and dominated assets on the back of expectations for a faster reopening for Britain's economy on the back of its rapid COVID-19 vaccination pace.

For instance, the UK is now into the third stage of its reopening which allows for indoor dining in pubs and restaurants. 

This bodes well for forthcoming economic data such as Retail Sales and the surveys of purchasing managers across industries and employment measures.

 The Bank of England will be tapering its bond-buying programme and the bond market is starting to price rate hikes into the currency.

Today, we have seen the UK bond market fall out of bed and UK yields sky rocket. The 10-year yield is currently 7.9% higher after rallying from a low of 0.7440% to a high of 0.8270%. 

This in turn has seen a bid in the pound which is currently trading at the highs of the day at 1.4207 vs the US dollar and 0.65% higher on the day so far. 

Sterling rose against the dollar on Thursday after a Bank of England policymaker,  Gertjan Vlieghe's comments. 

Vlieghe said that the central bank was likely to raise rates well into next year, while noting an increase could come earlier if the economy rebounds more quickly than expected.

"My central scenario is that the economy evolves similarly to the MPC's central projection in May, but with somewhat more slack than in the central projection," Vlieghe said in a lecture at the University of Bath.

"In that scenario, the first rise in bank rate is likely to become appropriate only well into next year, with some modest further tightening thereafter," he added.

However, it should be noted that Vlieghe will be departing the BoE's rate-setting committee this August.

Therefore, such comments are conditioned on a smooth transfer from the British government's furlough scheme.

Nevertheless, sterling also hit a six-day high against the euro, gaining 0.3% to 85.99 pence.

On the EU front, we heard from Jens Weidmann, a European Central Bank (ECB) Governing Council member and Bundesbank President, who said on Thursday, ''it is crucial to keep fiscal support measures targeted and limited in time; crucial to put public finances back on a solid footing after pandemic,"

"It must be clear to everyone that we are not putting monetary policy at the service of fiscal policy," Weidmann added. "The current high level of government intervention in the economy is justifiable in a crisis situation but should not become the new normal."  

On the data front, there was a disappointment in soft June GfK Consumer Confidence.

Germany reported soft June GfK consumer confidence.  It came in at -7.0 vs. -5.2 expected and a revised -8.6 (was -8.8) in May.    

EUR/GBP technical analysis

As per the following chart analysis, the price is destined to a lower low and deeper test of the daily support as follows:

Weekly chart

Daily chart

Hourly chart

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