EUR/GBP: soaking up the massive spot volatility after EZ PMI/UK CPI disappointments

EUR/GBP has moved into a sideways drift from after a heightened level of volatility in European trade where highs were faded as NY traders walked in. EUR/GBP has traded within a range of between 0.8739 and 0.8797, whipsawed by the UK CPI and EZ Markit PMI.

First, of, remember all activity today around the euro could be superseded as to the developments of Italy forming a government. Markets are waiting for the Italian president to make an announcement as to who will lead the coalition government, and perhaps even more important, the person to steer Italy’s finances which matters more for the indebted country’s future - (The euro has come under increasing pressure against the backdrop to the uncertainties of Italy's political environment and implications for an already fragile eurozone project).

Meanwhile, the PMI's were a disappointment, sending the euro off a cliff. Euro-area composite PMIs dropped to 54.1 from 55.1 in April with both manufacturing and services significantly down. Those PMIs added complications to the ECB’s exit from net asset purchases. ECB’s Coeure came out and said that QE probably won't end abruptly after September.

Eurozone money markets are now pricing less than a 60 percent chance of a 10 basis point interest-rate rise from the European Central Bank (ECB) by mid-2019 -  (Reuters reported). EUR/GBP was as low as 0.8739 on the back of all this and EUR/USD hit fresh YTD lows at 1.1690).  

UK CPI diminishes chances of a UK rate hike this summer

Then, crossing the channel to the UK, it wasn't long before the euro looked like a bargain at those levels after the UK CPI data signalled that there are even fewer chances of a summer rate hike from the BoE. 

As noted by analysts at ING Bank, at 2.4%, UK inflation has continued to tumble more quickly than expected:

"That’s despite a fairly punchy 1.2% increase in petrol prices, and the largest ever April rise in soft drink cost on the back of the newly introduced 'sugar tax'," the analysts explained. 

EUR/GBP climbed to as a high as 0.8796 over the course of the London session before hitting a wall of supply back down to 0.8761 - (note, EUR/USD flows remained better offered). 

From here, it all very much depends on how the data will pan out in the UK. If there are no significant signs of recovery before August's meeting, and depending on how the pound fares up, it is very unlikely that the BoE will be hiking rates, unless there are some healthy revisions to Q1 economic activity and signs that Q2 can bounce back just as well, setting up prospects for wage inflation to follow through for the second half of the year. 

"With consumer’s remaining cautious and borrowing appearing to have fallen substantially, a rate hike over the next few months is certainly not a done deal. As we heard from the BoE’s Vlieghe yesterday, the cost of waiting is not particularly high," analysts at ING explained.

• Cable was as low as 1.3305 earlier after the CPI data.

EUR/GBP levels

The pair is still within the vicinity of the daily moving averages with the attempts back towards the key rising channel and 100-D SMA. 0.8820 is the key resistance that guards the 200-D SMA at 0.8861. 0.8740, 0.8712, and a wider 0.8620 guards a run towards 0.8526 as being the 78.6% retracement of the move from 2017 on the wide.