EUR/GBP sticks to modest gains around 0.8600 post-German CPI, lacks follow-through

The EUR/GBP cross held on to its modest gains around the 0.8600 round-figure mark and had a rather muted reaction to mixed German consumer inflation figures.

The preliminary data published by Destatist showed that headline German CPI is seen edging lower to 0.5% in May from 0.7% in the previous month. This, however, was better than consensus estimates pointing to a reading of 0.3%. On a yearly basis, the CPI climbed 2.5% as against market expectations for a rise to 2.4% from 2% in April.  Further details revealed that the Harmonized Index of Consumer Prices (HICP) – the European Central Bank's preferred gauge of inflation – rose to 2.4% YoY and fell short of consensus estimates pointing to a reading of 2.5%.

This comes amid a subdued US dollar demand, which extended some support to the shared currency and provided a modest lift to the EUR/GBP cross. This marked the second consecutive day of a positive move and pushed the cross further away from the two-and-half-week lows touched last Friday. That said, the upside remains limited amid the optimistic outlook for the UK economy amid the gradual easing of lockdown measures. In fact, UK Prime Minister Boris Johnson said last week that there is nothing in the data to delay the plan to end restrictions fully on June 21.

Adding to this, the Bank of England policymaker Gertjan Vlieghe indicated that the central bank was likely to raise rates well into next year. Vlieghe also noted that an increase could come earlier if there is a smooth transition from furlough and the economy rebounds more quickly than expected. The combination of factors acted as a tailwind for the British pound and kept a lid on any meaningful upside for the EUR/GBP cross, at least for the time being. This, in turn, warrants some caution for bullish traders and before positioning for any further appreciating move.

Technical levels to watch