EUR/GBP extends bounce off yearly low to 0.8550 as ECB rate hike concerns challenge BoE hawks

• EUR/GBP picks up bids to refresh intraday high, stretches recovery from 10-month low.
• ECB policymakers suggest higher rates despite softer German PPI.
• UK’s two-year borrowing costs jump to 15-year high, suggesting more power for BoE hawks.
• Risk catalysts eyed ahead of Wednesday’s British inflation.

EUR/GBP renews intraday high near 0.8550 as it picks up bids to stretch the previous day’s rebound from the lowest levels since August 2022 heading into Tuesday’s London open. In doing so, the cross-currency pair justifies hawkish concerns from the European Central Bank (ECB) while ignoring German inflation clues and the expectations of the Bank of England (BoE) rate hikes.

Germany’s Producer Price Index (PPI) rises by 1.0% for May versus 1.7% YoY expected and 4.1% prior whereas the monthly figures spread disappointment with -1.4% mark compared to -0.7% market forecasts and 0.3% previous readings. It’s worth noting that statistics from Germany and the Eurozone have recently flagged concerns of the economic slowdown in the old continent and challenged the Euro bulls.

Even so, European Central Bank (ECB) policymaker Peter Kazimir said on Monday, “We need to raise rates again in July.” On the same line, ECB Chief Economist Philip Lane said that another rate hike in July seemed appropriate but noted that the decision in September will depend on incoming data, per Reuters. Furthermore, ECB Governing Council member Isabelle Schnabel also said, “Risks to the inflation outlook are tilted to the upside.” ECB’s Schnabel also cited the need to keep raising interest rates until seeing convincing evidence that developments in underlying inflation are consistent with a return of headline inflation to 2%.

On the other hand, The Times came out with the news suggesting that the UK government’s two-year borrowing costs have risen above 5% for the first time in 15 years amid mounting expectations that the Bank of England (BoE) will lift interest rates again this week as it battles to contain inflation. The news also added that the Gilt yields, which move inversely to the British Pound prices, have soared in recent days as traders bet that Threadneedle Street will need to raise rates further and will keep them higher for longer than had been anticipated.

Elsewhere, the fears of slower economic recovery in the UK join the US-China tension to weigh on the sentiment and allow the Euro pair to remain on the front foot versus the Pound Sterling. While portraying the mood, S&P500 Futures print mild losses whereas the US 10-year and two-year Treasury bond yields grind near 3.82% and 4.75% respectively by the press time, after rising in the last two consecutive days.

Moving on, a light calendar in Eurozone and the UK may restrict immediate EUR/GBP moves ahead of Wednesday’s UK inflation data and Thursday’s Bank of England (BoE) Monetary Policy Meeting.

Technical analysis

Oversold RSI conditions triggered the EUR/GBP pair’s rebound from a 13-day-old falling support line, close to 0.8510 by the press time. However, the quote’s recovery remains elusive unless it crosses the two-month-old resistance line, near 0.8580 at the latest.