EUR/GBP jumps above 0.8500 as the euro gains momentum ahead of ECB

• ECB meeting: speculations about a 50 bps rate hike boost the euro.
• Europe faces an energy crisis and political uncertainty in UK and Italy.
• EUR/GBP finds resistance at the 20 and 55-day SMA.

The euro is among the top performers on Tuesdays ahead of the European Central Bank meeting. The EUR/GBP cross rose to 0.8540, the highest level in 12 days.

ECB meets on Thursday

Reports on Tuesdays suggested that ECB officials will debate hiking interest rates by 50 basis points at the meeting this week and they are still negotiating the "antifragmentation" tool. The odds of a 50bps rose, boosting the euro. Still, market consensus is for 25bps. 

The German 10-year yield is up 3% at 1.24% while the Italian reference is flat as it stands at 3.38%. Italy will face a crucial day on Wednesday. PM Mario Draghi will speak at the Parliament following his resignation. The outcome could be Draghi staying in power, or President Sergio Mattarella being forced to call early elections.

The euro also benefited after the European Union softened sanctions on Russian banks. More recently, Reuters informed that Russia is expected to restart Nord Stream 1 gas flows on Thursday as planned. 

In the UK, economic data showed the unemployment rate remained at 3.8% in the three months ending in May. Average weekly earnings rose 6.2% from a year ago, below the 6.9% of market consensus. Inflation data will be released on Wednesday. The CPI June print will be a key input for the Bank of England. Analysts at TD Securities said that labor numbers “does not change anything for our overarching BoE call, and we still expect a strong June CPI print to push the Bank to hike Bank Rate by 50bps in August.”

Only three contenders remain at the Tory race leadership. Kemi Badenoch was eliminated in the fourth round with 59 votes. Rishi Sunak received 118 votes (+3 from Monday’s vote), Penny Mordaunt 92 (+10) and Liz Truss 86 (+15). On Wednesday, the two names of the final battle will be decided after another round.

EUR/GBP bullish, facing resistance at 0.8545

The EUR/GBP continues to recover after falling last week to the 0.8400 zone. Price is approaching the 20-day Simple Moving Average that stands at 0.8542; so far it failed to hold above the 55-day SMA at 0.8532. A daily close clearly above both lines should point to more strength for the euro. The bullish tone will likely remain in place in the short-term while above 0.8485.

Below 0.8460 a test of 0.8430 seems likely. A consolidation under 0.8430 should clear the way to more losses and for a new test of 0.8400.

Technical levels