- The EUR/GBP rises above 0.8500, with prices finding support above key mobile socks.
- ECB officials suggest that the monetary flexibility cycle may be close to its end, supporting the euro.
- The EUR/GBP is closely observing inflation expectations of the United Kingdom and Germany data, which could impact expectations for the ECB and BOE.
The euro (EUR) is extending profits against the pound sterling (GBP) on Thursday while the markets digest the publication of economic data of the United Kingdom and comments from central banks.
With the EUR/GBP quoting above 0.8500 at the time of writing, Friday’s economic calendar could continue to influence the short -term trajectory of prices.
The key data to be observed include the consumer inflation expectations of the United Kingdom, previously in 3.4%, which will provide information on the public’s perspective about the growth of future prices and could influence the feeling of the GBP.
From the Eurozone, the markets will be attentive to the harmonized consumer price index (IAPC) of Germany for May, which is expected to be maintained at an annual rate of 2.1%. April industrial production data, with expectations of a monthly drop of -1.7% and an annual increase of 1.4%, indicate a possible deceleration in manufacturing activity. In addition, the figures of the commercial balance of the Eurozone are expected.
The data of the United Kingdom disappoint, feeding additional betting of rates cuts from the Bank of England
A series of data points published by the United Kingdom provided a gloomy vision of the current state of the economy.
Among these important economic publications were the data of the trade balance of goods for April, the Gross Domestic Product (GDP) and the industrial and manufacturing production data.
The consensus is that the economy of the United Kingdom is weakening in general, and its growth forecasts now reflect a more pessimistic tone, with all the readings of the data mentioned above breaching expectations.
In addition, the National Institute of Economic and Social Research (NIESR) published its May growth estimate for the three months prior to the report. The real figure was 0.4%, below 0.7% reported in April.
In addition, the United Kingdom labor market also disappointed down. The change in the number of applicants showed that the number of people who requested unemployment benefits increased by 33,100 in May. The data reversed the revised fall of the previous month of 21,200 and did not comply with the forecasts of an increase less than 9,500.
After the data, bets in favor of additional BOE rates cuts increased, with the markets now assessing two more rates cuts this year. According to a Reuters survey published on Tuesday, most analysts (59 economists) anticipated that the Bank of England (BOE) would cut the rates in 25 basic points (PB) in third parties and quarters quarters. This would reduce the bank rate to 3.75% from 4.25%.
ECB speakers point out that monetary flexibility may be coming to an end, supporting the strength of the EUR/GBP
For the European Central Bank (ECB), the comments of the speakers this week have pointed out a possible pause in the monetary policy flexibility cycle. The speakers of the ECB Isabel Schnabel, Madis Muller and the president of the ECB Christine Lagarde made statements this week indicating that inflation is reaching the objective of the Central Bank and that the end of the cycle can be close.
The highest rates perspectives and the possibility of a reduction in divergence between the ECB and the BOE raised the EUR/GBP, with prices rising to a level that remained as resistance during May about 0.8515.
EUR/GBP price action proves a critical fibonacci resistance above 0.8500
The EUR/GBP torque has recently shown an upward change in the momentum, with the price breaking above the simple mobile socks (SMA) of 50 days and 100 days, currently at 0.8485 and 0.8415, respectively.
This movement suggests a growing upward pressure, especially since the torque has now tried the key psychological level of 0.8500 and is challenging the resistance that was maintained during May about 0.8515.
If the EUR/GBP is maintained above this area, it could aim at an additional resistance around the psychological level of 0.8600, with the maximum of April in 0.8738 serving as a higher extension target.
However, the relative force index (RSI) is currently in 64, indicating an increase in the bullish momentum but also approaches the overcompra territory, which could lead to a short -term setback. A ruling to stay above 0.8500 could see when revising the support around 0.8449 or even the minimum of May at 0.8355 if the bearish pressure resumes.
EUR/GBP daily graphics
FAQS Central Banks
Central banks have a key mandate that consists in guaranteeing the stability of prices in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant decrease in the prices of the same goods means deflation. It is the Central Bank’s task to keep the demand online by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (FED), the European Central Bank (ECB) or the Bank of England (BOE), the mandate is to maintain inflation about 2%.
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. In precommunicated moments, the Central Bank will issue a statement with its reference interest rate and give additional reasons of why it maintains or modifies it (cut it or the SUBE). Local banks will adjust their savings and loan rates accordingly, which in turn will make it difficult or facilitate that citizens obtain profits from their savings or that companies ask for loans and invest in their businesses. When the Central Bank substantially rises interest rates, there is talk of monetary hardening. When it reduces its reference rate, it is called monetary relaxation.
A central bank is usually politically independent. The members of the Central Bank Policy Council go through a series of panels and hearings before being appointed for a position in the Policy Council. Each member of that council usually has a certain conviction on how the Central Bank should control inflation and the consequent monetary policy. Members who want a very flexible monetary policy, with low types and cheap loans, to substantially boost the economy, while comprising with inflation slightly greater than 2%, are called “pigeons.” Members who prefer higher types to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is located at 2% or just below.
Normally, there is a president who directs each meeting, has to create a consensus between the hawks or the pigeons and has the last word when the votes must be divided to avoid a draw to 50 on whether the current policy must be adjusted. The president will pronounce speeches, which can often be followed live, in which he will communicate the current monetary position and perspectives. A central bank will try to boost its monetary policy without causing violent oscillations of the fees, the actions or their currency. All members of the Central Bank will channel their position towards the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, the members are prohibited from speaking publicly. It is what is called a period of silence.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
