EUR/GBP Falls Below Key Support on ECB Rate Cut Prospects

EUR/GBP Analysis

The Bank of England slashed rates at the start of the month due to the steep deceleration in price pressures and fragile economic activity, in a move that sent EUR/GBP to the highest levels since April. However, the 5-4 split vote highlights the uncertainty around the intentions of policymakers and Governor Bailey warned that they "will need to be careful" to not lower rates "too quickly or by too much". ^[2]

Although at least one more reduction seems reasonable within the year, a back-to-back move in September does not look easy, with the latest Reuters poll pointing to a hold ^[2]. After two months at BoE's 2% target inflation picked up again in July as expected, while the economy is improving and pay growth remains high by historical standards despite significant moderation.

The European Central Bank was faster than its UK counterpart, as it lowered rates back in June. Although at last month's hold President Lagarde said the September decision is "wide open" ^[3], another rate cut looks increasingly likely. Some of its colleagues like Mr Rehn pointed to such move this week ^[4]. Despite exiting its brief recession the European economy remains weak, disinflation is on track and the latest data showed a substantial moderation in Q2 wage growth.

The monetary policy differential remains unfavorable for EUR/GBP, which runs its second straight losing week, moving below the EMA200 (black line). Bias is on the downside with scope for further losses towards the lower border of the daily Ichimoku cloud, although new 2024 lows will need fresh catalyst.

On the other hand, the ECB's next move if far from certain and recent inflation figures have shown persistence, while the BoE has a habit of surprising markets. Furthermore, the RSI pints to overbought conditions so a recovery effort would not be surprising, bust sustained strength looks hard under current conditions.