EUR/GBP Sets Nearly 2-Year Lows as the ECB Heads Towards a Rate Cut

  • EURGBP
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EUR/GBP Analysis

The pair runs its third straight losing month in an already negative year and hit the lowest levels since August 2022, due to unfavorable monetary policy differential. Disinflation progress and weak economic activity have pushed the ECB closer to a pivot and officials have pointed towards a rate cut at next week's meeting. This would make the ECB the first major institution to remove monetary restraint, as its biggest counterparts show reluctance.

The Bank of England has also hinted to a less restrictive stance ahead, while its Governor did not shut the door to a June pivot. However, markets priced out such action following the recent CPI print, which was hotter than expected, despite its sharp deceleration to 2.3% y/y. The situation becomes more complex by the July 4 general election and the BoE's murky communications.

EUR/GBP is now vulnerable to further losses towards the 0.8400 region, as the rate path differential could weigh further on the common currency. On the other hand, bears have struggled to extend the losses past the current levels this year, so there is scope for a rebound towards the EMA200 (at around 0.8550). Daily closes above it would pause the downside momentum and bring the 2024 highs back in the frame (0.8645), but the upside is difficult.

The ECB is likely to pivot, but the path ahead is far from certain and various officials have warned against back-to-back hikes, while recent inflation and wage data have shown persistence. The timing of the BoE's next move is highly contentious, but it is likely to follow its European peer within the summer, so monetary policy may not be able to drive much more downside.

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Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

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