EUR/GBP falls as Eurozone inflation reinforces dovish ECB expectations

The EUR/GBP slides to moving average support, with prices edging closer to the 0.8400 psychological level.
The Eurozone’s preliminary inflation figures came in below estimates, reinforcing the odds of an ECB rate cut on Thursday.
EUR/GBP continues to monitor the economic outlook for both the UK and the EU for signs of potential monetary policy divergence.

Tammy Da Costa, CFTe®FXStreet

The Euro (EUR) is suffering a setback against the Pound Sterling (GBP) on Tuesday, with prices falling to the 10-day Simple Moving Average (SMA) near 0.8415.

At the time of writing, EUR/GBP is trading below the 78.6% Fibonacci retracement level of the March-September 2022 move (from 0.8203 - 0.9254), now serving as resistance at 0.8428.

On Tuesday, the Eurozone preliminary Core Harmonized Index of Consumer Prices (HICP) continued to show signs of easing in May. On an annual basis, the core HICP advanced 2.3% agains a 2.7% growth in April, missing forecasts of 2.5%.

With inflation falling closer to the European Central Bank’s (ECB) 2% target, the ECB looks poised to cut interest rates at its monetary policy meeting on Thursday.

Analysts are pricing in the potential for a 25-basis-point (bps) rate cut before committing to a clearer rate outlook for the remainder of the year.

For the Bank of England (BoE), a resurgence in inflation and better-than-expected economic data has provided more room for the BoE to hold back on additional rate cuts at the June 19 meeting, which could provide additional support for the Pound Sterling this week.

EUR/GBP grapples with Moving Average support

As illustrated on the daily chart below, a move below the 10-day Simple Moving Average (SMA) could provide bears with the opportunity to drive prices back to the key psychological level of 0.8400, opening the door for a potential retest of the May low at 0.8356.

In contrast, a move back above 0.8415 and above 0.8428 may allow bulls to move toward Monday's high near 0.8450.

EUR/GBP daily chart

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Tammy Da Costa, CFTe®

FXStreet

Tammy is an economist and market analyst with a deep passion for financial markets, particularly commodities and geopolitics.

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