EUR/GBP hovered around 0.8550 on Thursday and was down 0.21% on the session, with the euro weakening as fresh data reinforced expectations of a more cautious European Central Bank (ECB). Eurozone inflation cooled faster than forecast, prompting markets to pare back expectations for another ECB rate rise at the July meeting. The Harmonised Index of Consumer Prices (HICP) eased to 2.8% year on year in June from 3.2%, undershooting the 3% consensus, while core HICP slowed to 2.4% from 2.6% in May, pointing to easing underlying price pressures.
Meanwhile, the Eurozone unemployment rate was unchanged at 6.2% in May, in line with the revised prior reading and below expectations of 6.3%, offering limited support against the impact of the inflation numbers on policy pricing. Policymakers’ messages remained mixed, with some pushing back against further tightening while others left the door open to either a hike or a hold. Attention now turns to Friday speeches from ECB President Christine Lagarde and Bank of England (BoE) Governor Andrew Bailey for further direction on monetary policy.
Monetary Policy Divergence Pressures EUR/GBP
We see the Euro continuing to struggle against the British Pound, with the EUR/GBP cross trading around 0.8550. This trend is driven by a clear divergence in monetary policy expectations between the European Central Bank and the Bank of England. The path of least resistance for this pair appears to be downwards in the near term.
The recent drop in Eurozone inflation to 2.8% is the main reason for the Euro’s weakness, significantly lowering the odds of another ECB rate hike this month. With core inflation also slowing to 2.4%, the data reinforces the view that price pressures are easing. This gives dovish ECB members, like Pierre Wunsch, a stronger case for holding rates steady.
In contrast, the UK’s economic picture supports a more firm stance from the Bank of England. Recent data from the Office for National Statistics showed UK wage growth, a key driver of inflation, remains elevated at 5.7%. This persistent wage pressure will likely keep the BoE from signaling any rate cuts soon, supporting the Pound.
Trading Strategy and Key Levels to Watch
Given this outlook, we believe positioning for a further drop in EUR/GBP is prudent. Buying August put options with a strike price around 0.8500 could be an effective strategy. This allows us to capitalize on a potential decline below this key psychological level while limiting our maximum risk to the premium paid.
We should be mindful of the speeches from ECB President Lagarde and BoE Governor Bailey scheduled for tomorrow. These events will likely increase short-term volatility, which can make options more expensive. Waiting until after the speeches to enter new positions could offer a better entry point once the market has digested the new information.
Historically, the 0.8500 level has acted as a significant area of support for EUR/GBP, as seen multiple times over the past year. A decisive break below this level could trigger a more substantial move lower towards the 0.8400 region. We will be watching price action around this key support very closely.
