EUR/GBP remains depressed around mid-0.8500s, seems vulnerable near YTD low

• EUR/GBP struggles to register any meaningful recovery from the YTD low touched earlier this week.
• Bets for more rate hikes by the BoE underpin the British Pound and act as a headwind for the cross.
• The ECB’s hawkish outlook lends support to the Euro and helps limit the downside, at least for now.

The EUR/GBP cross trades with a mild negative bias, around mid-0.8500s heading into the European session on Friday and remains well within the striking distance of its lowest level since August 2022 touched earlier this week.

The British Pound (GBP) continues with its relative outperformance in the wake of expectations that the Bank of England (BoE) will be far more aggressive in policy tightening to contain stubbornly high inflation. In fact, the headling UK CPI, at 8.7% in April, is still running more than four times the central bank's target. This, in turn, cemented market bets for another 25 bps BoE rate hike on June 22, which is seen underpinning the Sterling and exerting some pressure on the EUR/GBP cross.

The shared currency, on the other hand, might draw support from the European Central Bank's (ECB) hawkish outlook, signalling further tightening to bring Eurozone inflation to its medium-term target of 2%. It is worth recalling that the ECB hiked interest rates for the eighth straight time on Wednesday, by 25 bps to 3.5% or the highest in 22 years. The inflation projection for this year was raised to 5.1% from 4.6%, suggesting that the central bank is still not done with the policy tightening.

This, in turn, is holding back traders from placing aggressive bearish bets around the EUR/GBP cross and helping limit any further losses, at least for the time being. Market participants now look forward to the release of the final Eurozone CPI report, which might do little to dent expectations about additional rate hikes by the ECB and provide any meaningful impetus. The lack of any buying interest, meanwhile, suggests that the path of least resistance for spot prices is to the downside.

Technical levels to watch