The euro to British pound (EUR/GBP) exchange rate continued its recent corrective move during early European trading on Thursday, retreating to the vicinity of 0.8620. Diminishing market expectations for the intensity of future European Central Bank rate hikes have become a primary factor weighing on the euro. At its monetary policy meeting this month, the ECB raised its deposit rate by 25 basis points to 2.25%, aligning with broad market expectations. However, beyond the rate hike itself, the market focused more intently on the policy signals conveyed by ECB President Christine Lagarde.
Lagarde stated that while energy price volatility stemming from the Middle East situation could impact eurozone inflation, the ECB need not respond with overly aggressive policy measures. She also noted that while the current inflationary shock in the eurozone cannot be ignored, it is not yet severe enough to drive a sustained rise in long-term inflation expectations. These remarks were interpreted by the market as a dovish signal. Investors believe the ECB is adopting a cautious stance on continuing rapid rate hikes in the future, leading to a scaling back of expectations for subsequent tightening policies.
Financial markets currently anticipate that the ECB may have room for only one or two more rate hikes in the coming months, with the next hike expected to be priced in before the end of the year. Compared to previous market expectations for consecutive hikes, the perceived policy path has clearly become more moderate. Concurrently, the recent sustained decline in international oil prices has also alleviated inflationary pressures in the eurozone. With positive progress in peace talks between the US and Iran and the normalization of traffic through the Strait of Hormuz, a significant volume of crude oil has re-entered the international market, leading to a notable retreat in energy prices from their previous highs.
The decline in energy costs implies that future imported inflationary pressures for the eurozone may ease, thereby reducing the necessity for the ECB to implement further substantial rate hikes. This is another key reason for the recent pressure on the euro. However, the pound also faces its own uncertainties. Recent fresh turmoil in UK politics, with Prime Minister Keir Starmer announcing his resignation, has sparked market concerns about the future direction of UK policy and fiscal planning.
Following Starmer's resignation, the Labour Party will hold a new leadership election, and the market is assessing the potential fiscal policies that Andy Burnham might pursue. Some analysts believe that if the future UK government adopts more proactive fiscal expansion measures and increases government bond issuance, it could pressure the UK's fiscal position and the pound's performance. Therefore, while the euro has weakened due to the ECB's dovish stance, UK political risks have also capped gains for sterling, resulting in relatively limited overall declines for EUR/GBP.
The market will next focus on speeches by ECB Chief Economist Philip Lane and Executive Board member Piero Cipollone. If these officials reinforce the cautious stance, the euro could face further pressure; conversely, if they signal more positive indications about future rate hikes, it could provide short-term support for the euro.
Technical Analysis: Daily Chart
From a daily chart perspective, EUR/GBP has retreated from recent highs and is currently trading around 0.8620, with the overall trend entering a phase of consolidation with a weak bias. The failure to effectively break above previous highs has triggered a pullback, indicating increasing selling pressure overhead. The immediate key support level is the 0.8600 psychological handle, with further support located in the 0.8550 and 0.8500 regions. Resistance above is seen at 0.8670, 0.8720, and 0.8780. As long as the exchange rate holds above 0.8600, the medium-term structure remains one of high-level consolidation.
Technical Analysis: 4-Hour Chart
Observing the 4-hour chart, EUR/GBP shows a short-term oscillating decline, with the price testing the support area near 0.8600. Short-term moving averages are beginning to flatten, suggesting a weakening of directional momentum. If the exchange rate can hold the 0.8600 support and break back above the 0.8670 resistance, it could resume its rebound and challenge the 0.8720 area. Conversely, a break below 0.8600 could lead to a further correction towards the 0.8550 level for support. Overall, the short-term movement is dominated by range-bound consolidation, with the market awaiting new directional cues from upcoming ECB official comments and developments in the UK political landscape.
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