EUR/GBP: ECB’s rate hike spurs modest EUR/GBP gains

• EUR/GBP sees modest gains, trading at 0.8562, following ECB’s 25 bps rate hike.
• ECB pushes inflation prospects up, sparking expectations for further rate hikes.
• BoE’s hawkish expectations spark Sterling’s strength, capping the Euro’s rally.

EUR/GBP trades with modest gains after the European Central Bank (ECB) raised rates by 25 basis points (bps) and telegraphed additional increases. However, expectations of further tightening by the Bank of England (BoE) capped the Euro’s (EUR) rally at 0.8591, recovering ground after Wall Street closed. At the time of writing, the EUR/GBP is trading at 0.8562, up 0.13%.

Rate hike prospects for the BoE temper Euro’s rise despite ECB’s bold monetary tightening

On Thursday, the European Central Bank (ECB) raised rates by 25 bps as expected, leaving the deposit rates at 2.50%, its highest level in 22 years. Besides increasing rates, the ECB staff revised inflation prospected to the upside, from 4.6% to 5.1%.

In the meantime, ECB President Christine Lagarde cemented the case for a rate hike in July but pushed back against expectations for a September increase. Lagarde added, “Wage pressures, while partly reflecting one-off payments, are becoming an increasingly important source of inflation.”

Even though inflation cooled somewhat, it is still three times the ECB’s goal of  6.1%. It should be said that prices have come down at the expense of slow economic growth, as recent GDP reports from the bloc suggest the economy hit a recession. Back-to-back negative quarters revealed that growth was cut to -0.1% in Q4 2022 and Q1 2023.

Aside from this, expectations for a hawkish Bank of England (BoE) capped the Euro’s gains, which was set to challenge the 0.86 handle. Nevertheless, money market futures estimates for the BoE to raise rates at least 100 bps in the next twelve months spurred an appreciation in the Sterling (GBP), which posted solid gains against the US Dollar.

EUR/GBP Price Analysis: Technical outlook

From a daily chart perspective, the EUR/GBP is tilted downwards, but since June 9, when it hit a low of 0.8540, the cross failed to extend its losses past the new year-to-date (YTD) low of 0.8536. since then, the EUR/GBP has been exchanging hands in a 70-pip range capped by the 20-day Exponential Moving Average (EMA) on the upside at 0.8610. Nevertheless, the ongoing downtrend started in February is still in place, and the path of least resistance is downwards.

The EUR/GBP first support would be the 0.8541, June 14 low. A breach of the latter will expose the YTD low of 0.8536 before dropping toward 0.8500. Upward risks lie above 0.8600, particularly at the 20-day EMA, followed by resistance at the 50-day EMA at 0.8677.