EUR/GBP rebounds sharply from multi-month lows to 0.8600

• On Monday's session, the EUR/GBP traded in the 0.8540 - 0.8608 range.
• HICP and CPI data from Germany and Spain are due on Tuesday.
• The Eurozone's inflation outlook may have an impact on future ECB decisions. 

On Monday, the EUR/GBP rose by 70 pips towards the 0.8605 area recovering from the multi-month low struck on Friday. With nothing relevant in the macroeconomic calendar, stocks set the session’s pace with the German DAX displaying more than 0.90% gains while investors await inflation data from Germany and Spain and labour market data from the UK on Tuesday.

German inflation is expected to stagnate and the British labour market to see some pain

On Tuesday, Destatis, the national statistical office of Germany, is set to release the Harmonized Index of Consumer Prices (HICP) data for the month of May. The headline figure, which represents the year-on-year change in consumer prices, is anticipated to remain unchanged at 6.3% rewarding its preliminary reading and the monthly measure is expected to show a 0.2% decrease. Likewise, the Spanish HICP is expected to show a 0.2% monthly decline with its headline figure remaining stagnant at 2.9% YoY. While markets have practically priced in a 25 basis points (bps) hike by the European Central Bank (ECB) on Thursday, the inflation reports may have an impact on future ECB decision expectations and hence on the Euro’s price dynamics.

On the British side, the Office for National Statistics will release labour market data on Tuesday. In that sense, the change in the number of those claiming jobless benefits is expected to have contracted in May by 9.6K from its previous 46.7K measure. In addition, the Unemployment Rate is seen slightly increasing to 4% while average earnings both including and excluding bonuses are expected to accelerate in the same period of time.

Ahead of next week’s Bank of England (BoE) decision, investors are expecting a 25 bps hike with only 15% odds of a bigger one as per World Interest Rate Possibilities (WIRP). On Monday, BoE’s Catherine Mann delivered slightly hawkish messages, showing her concerns for sticky core inflation and stating that she is waiting for analysis of data to decide the next vote. In that sense, the BoE’s hawkish stance may limit the GBP’s losses.

EUR/GBP levels to watch

According to the daily chart, the EUR/GBP holds a neutral to a bearish outlook for the short term as indicators lost traction but still stand in negative territory. The Relative Strength Index (RSI) sits below its midline but displays a positive slope, while the Moving Average Convergence Divergence (MACD) prints decreasing red bars suggesting that the bears are running out of steam.

The multi-month low at the 0.8540 level remains the key support level for EUR/GBP. If broken, the 0.8520 zone and psychological mark at 0.8500 could come into play. Furthermore, a move above the 0.8600 zone may reignite the upside momentum for the cross , with next resistances at the 0.8620 area and 20-day Simple Moving Average (SMA) at 0.8640.