EUR/GBP corrective bounce from yearly low prods 0.8600 as traders recheck ECB vs. BoE formula

EUR/GBP bears take a breather at the yearly low as markets reassess the latest dynamics on early Friday. With this, the cross-currency pair picks up bids to consolidate the recent losses near 0.8590 as it rebounds from the lowest levels since late 2022 amid mixed concerns.

Apart from the market’s consolidation ahead of the US Nonfarm Payrolls (NFP) and recent hawkish comments from European Central Bank (ECB) executive board member Fabio Panetta also allow the quote to lick its wounds. That said, the policymaker said, “We have not reached the end of the rate hike cycle.”

Additionally, the market’s fears that the higher rates in the UK will negatively affect the mergers and acquisitions at home, as well as the economic performance, seem to have prodded the British dealmakers of late. “Activity in mergers and acquisitions in Britain is at its lowest level in seven years as dealmakers remain cautious about the economic outlook,” said The Times.

On the same line are the headlines from the Financial Times (FT) stating that the UK should join a pan-European agreement on goods trade to limit the damage to its car industry from looming post-Brexit tariffs instead of seeking a delay to their introduction, according to senior officials in Brussels.

It should be noted that the upbeat UK data versus downbeat EU statistics joined mixed comments from the ECB and the Bank of England (BoE) officials to keep the EUR/GBP bears happy previously.

On Thursday, the UK S&P Global/CIPS Manufacturing PMI improved to 47.1 for May versus 46.9 initial estimations. Further, the latest Bank of England (BoE) Monthly Decision Maker Panel (DMP) survey, released on Thursday, businesses in the UK see the year-ahead Consumer Price Index (CPI) at 5.9% in May vs 5.6% in April. On the other hand, Eurozone Inflation, per the European Central Bank's (ECB) preferred gauge of inflation, namely the annual Harmonised Index of Consumer Prices (HICP), rose 6.1% YoY in May versus 6.3% expected and 7.0% prior. Further details suggest that the Core HICP also softened to 5.3% from 5.6% prior and 5.5% market forecasts.

Even so, the accounts of the European Central Bank's (ECB) May policy meeting revealed that a number of members initially expressed a preference for increasing the key interest rates by 50 basis points. Furthermore, President Christine Lagarde said, “We need to continue our hiking cycle until we are sufficiently confident that inflation is on track to return to our target in a timely manner.”

It’s worth quoting that the latest Bank of England (BoE) Monthly Decision Maker Panel (DMP) survey, released on Thursday, signaled that businesses in the UK see the year-ahead Consumer Price Index (CPI) at 5.9% in May vs 5.6% in April, which in turn suggests higher rates in the UK.

To sum up, comparatively more intense inflation pressure in the UK allows EUR/GBP bears to remain hopeful despite the latest rebound.

Technical analysis

Thursday’s Doji candlestick on the daily chart joins the oversold RSI (14) line to underpin the latest corrective bounce. The recovery moves, however, appear elusive unless crossing a five-week-old descending resistance line near 0.8671.