EUR/GBP Challenging the £0.85 Support Level Ahead of Key ECB Meeting

EUR/GBP Under Pressure: Over the past two weeks, EUR/GBP has declined from a high of £0.8620 reached on May 10^th, dropping to a low below £0.85. Expectations of imminent ECB rate cuts, in contrast with the UK’s higher inflation pushing back BoE rate cut expectations, are expected to widen the interest rate differential, putting downward pressure on the pair.

ECB Rate Cut Expectations: Markets are anticipating a 25-basis point rate cut from the ECB next week, with no additional cuts expected in July. The Eurozone’s core inflation is decreasing faster than in the U.S. and the U.K., supporting the ECB’s case for cutting rates.

UK Inflation Data: Recent stronger-than-expected CPI figures suggest that inflationary pressures remain resilient in the UK, pushing back the timeline for potential BoE rate cuts.

Significant Support at £0.85: The £0.85 level is critical, marking the lower boundary of the long-term range established over the past two years. This level, which was last tested and rejected in August 2023, plays a significant role in market dynamics.

Short-term Resistance Levels: The market has formed a sideways consolidation between a low of £0.8490 and a high of £0.8530, with an intermediate short-term resistance at £0.8520. The £0.8530 level is defending the downwards momentum in the medium-term, with bearish pressure expected to persist while below this threshold.

Bearish Trend: With a strongly bearish trend on the daily timeframe, the break below the £0.85 support level signals a continuation of the trend, with increased volatility expected as this level is challenged. As long as the market remains below the key £0.85 support level, the decline is expected to accelerate, leading to new two-year lows. Only a retracement and daily close back above £0.85 would indicate a weakening of the downward momentum, prompting a reassessment in the short-term.

Potential for Bullish Reversal: Given the significance of the £0.85 support level, there is potential for a bullish reversal. A break above the short-term resistance at £0.8520 could signal changing sentiment, while a move above £0.8530 would mark a more definitive short-term reversal.

Eurozone Inflation Data: The inflation data due on Friday will be critical in shaping market expectations for ECB policy actions. Softer inflation would likely strengthen the case for an early rate cut. However, any upward surprise in the inflation figures could delay the expected rate cut, potentially introducing new volatility to the pair, and bring support for the euro.

Market Expectations: Traders should prepare for potential market adjustments based on ECB’s anticipated policy changes and upcoming inflation data from the Eurozone and the UK. These factors will be pivotal in shaping the EUR/GBP exchange rate in the near term.

EURGBP 1Hour Chart

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