EUR/GBP rises to its highest level since May following soft UK CPI

• The EUR/GBP cross peaked at a daily high of 0.8700 and then settled near 0.8660.
• UK’s headline CPI declined to 7.9% YoY, lower than expected.
• Lower British yields and dovish bets on the BoE made the GBP struggle to find demand on Wednesday.

The EUR/GBP set a fourth consecutive day of gains and rose to its highest level since late May but faced resistance at the 100-day Simple Moving Average (SMA) at 0.8700 and then retreated to 0.8657. As UK inflation figures came in lower than expected, the GBP trades with losses against most of its rivals on Wednesday, including the USD, EUR, JPY, CAD, etc.

Investors are confident that the BoE won’t be as aggressive as expected amid soft CPI

According to the Office for National Statistics, the Consumer Price Index (CPI) fell to 7.9% year on year in June, lower than the 8.2% predicted and the preceding 8.7%. The Core CPI fell to 6.9% and also fell short of the estimates of 7.1%.

As a result, UK  shorter-term bond yields fell as much as 4%  as markets bet on a dovish Bank of England's (BoE) . The probability of a 50 basis point (bps) raise at the next BoE meeting in August has dropped to roughly 45%, according to the World Interest Rates Probabilities (WIRP). Markets are discounting 55% odds of 25 bps increase in September, November, and February 2024, with the terminal rate peaking at 5.75%. In that sense, the expectations of lower rate hikes applied selling pressure on the Pound.

On the Euro’s side, all eyes are on next week’s European Central Bank’s (ECB) decision, where a 25 bps hike is already discounted, and investors will look for clues regarding the next steps. On Wednesday, Core Harmonized Consumer Price Index (HICP) was upwardly revised to 5.5% and continues to be near March’s peak of 5.7%. It may pressure the ECB to continue hiking, so Christine Lagarde’s outlook will be closely monitored.

EUR/GBP Levels to watch

The daily chart suggests that the short-term technical outlook is neutral to bullish. The neutral bias is that the bulls failed to consolidate above the 100-day SMA and trade below the 200-day SMA while the positive tilt is given by indicators gaining ground and standing in positive territory. 

Resistance levels: 0.8700 (100-day SMA), 0.8726 (200-day SMA), 0.8750.
Support levels: 0.8640, 0.8600, 0.8580.

EUR/GBP Daily chart