EUR/GBP: Pound sterling outlook ahead of UK inflation report

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on May 21, 2024
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  • The EUR/GBP exchange rate drifted downwards on Tuesday.
  • The UK will publish the latest consumer and producer inflation data.
  • Analysts expect the ECB and BoE to start cutting interest rates in June.

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The euro to GBP (EUR/GBP) exchange rate drifted downwards as traders focused on the upcoming UK consumer price index (CPI) data and potential ECB and BoE rate cuts. It retreated to a low of 0.8550 on Tuesday, down from this month’s high of 0.8645.

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UK inflation data ahead

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The EUR/GBP pair has moved downwards as it became clear that the European Central Bank (ECB) and the Bank of England (BoE) will start cutting interest rates, which stands at 4.35% and 5.25%, respectively.

Recent economic numbers show that Europe’s inflation has dropped sharply in the past few months. Data by Eurostat revealed that the bloc’s inflation dropped to 2.4% in April as it moved close to the ECB’s target of 2.0%.

The UK will publish the upcoming UK CPI and PPI numbers on Wednesday. Economists expect the data to show that the headline CPI moved from 3.2% in March to 2.1% in April. Some analysts believe that the figure dropped below 2.0% as energy prices slumped.

However, the expectation is that the core inflation remained stubbornly high, falling from 4.2% to 3.6%. The PPI input and output figures are expected to come in at 0.4%. 

Most economists believe that the two banks will deliver two rate cuts this year to supercharge its economies. Recent economic numbers revealed that the two economies are doing modestly well.

The UK has exited a technical recession while the European GDP expanded by 0.3% in Q1, reversing a 0.1% contraction in the previous month.

Therefore, there is a possibility that the pound sterling will be stronger than the euro because of its carry trade opportunities since the UK’s rates will remain higher than in Europe.

EUR/GBP technical analysis

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EUR/GBP

EUR/GBP chart by TradingView

The EUR to GBP exchange rate has retreated significantly in the past few days. In this, it has dropped to the lower side of the ascending channel. It has also dropped below the 50-day and 100-day Exponential Moving Averages (EMA).

Additionally, the pair has formed a head and shoulders pattern, a popular bearish sign while the Relative Strength Index (RSI) and the Stochastic Oscillator have also pointed downwards.

Therefore, the outlook for the pair is bearish, with the next level to watch being at 0.8500, its lowest point in March this year and July and August last year.

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