EUR/GBP Could Drop Further As BoE Rate Hike Bets Increase

The EUR/GBP is down 0.36% on the day and the same amount this week, following solid labour and retail sales data supporting the Pound over the Euro. A slew of positive data from the UK has prompted an increase in bets that interest rates in the UK would rise more than expected. 

The UK unemployment rate fell from 3.8% to 3.7%, beating market expectations that it would remain static. The Claimant Count also fell from -81.6K to -56.9K. Core retail sales also came in higher than the markets had expected, with a print of 0.6% against a market consensus of 0.4%. This result provided a significant boost to the Pound after previous reports from NielsenQ and Kantar had painted a dire picture of the UK’s retail sector. 

Inflation continues to be a problem in the UK, pushing food, energy and home prices to record highs. The Average Earnings Index rose from 5/6% last month to 7.0%, showing a wage inflation picture. With analysts pricing in another 25bps interest rate hike at the June 2022 Bank of England (BoE) meeting and a further 125bps by the end of the year (up from 115bps), the Pound looks set to gain more ground against its peers. What is the EUR/GBP outlook given this situation? 

EUR/GBP Outlook

The EUR/GBP completed the bullish pennant with a touch on the 0.85961 resistance before retreating to the current levels. The active candle has violated the support at 0.84611 and looks set for a push to the 0.84381 support (18 May low). A breakdown of this level sends the pair towards the 0.83932 pivot leaving 0.83681 as the additional target to the south. 

On the flip side, a failure of the violation of the 0.84611 support may allow the bulls to make a push towards the 0.85883 resistance (18/19 May lows). Only a break of this level allows the bulls to access the 0.85105 resistance. 0.85372 would remain in the running as an additional northbound target. 

GBP/USD: Daily Chart