EUR/GBP looks set for a bumpy ride below 0.8610 post weak German Factory Orders

• EUR/GBP is expected to extend its downside journey below 0.8610 as the German recession could deepen further.
• German Factory Orders have contracted at a higher pace than forecasted amid higher interest rates by the ECB.
• UK’s inflation is extremely stubborn and the BoE cannot pause its policy-tightening spell at this juncture.

The EUR/GBP pair has slipped sharply to near 0.8610 in the London session. The asset witnessed a steep fall after the release of weak German Factory Orders data. Deutsche Bundesbank reported a contraction in monthly Factory Orders by 0.4% while the street was anticipating an expansion by 3.8%. Annual Factory Orders contracted significantly by 9.9% vs. the estimates of 8.4% contraction.

European Central Bank’s (ECB) aggressively tight monetary policy has squeezed lending from Eurozone commercial banks. Firms seem reluctant to raise funds for augmenting fixed and working capital requirements at higher interest rates due to which less capacity is in utilization.

Investors should note that the German economy has already registered a recession after posting a contraction in Gross Domestic Product (GDP) for straight two quarters. And, now weak German Factory Orders are demonstrating a bleak economic outlook.

However, the ECB might continue raising interest rates further amid persistence in core inflation. ECB President Christine Lagarde reiterated in front of the European Parliament in Brussels on Monday that price pressure remains strong in the Euro area. Also, ECB policymaker Klaas Knot said recently, “We will keep tightening policy until we see inflation returning to 2% but this must be done step by step.”

Meanwhile, the Pound Sterling has been underpinned by the market participants despite a decline in United Kingdom households’ spending on non-essential items. The British Retail Consortium (BRC) said spending in its members' stores increased 3.9% in annual terms last month, well above the 1.1% fall a year ago, however, sales were below the 5.2% rise in April, as reported by Reuters.

In spite of that, UK’s inflation is extremely stubborn and the Bank of England (BoE) cannot pause its policy-tightening spell at this juncture.