The EUR/GBP currency pair faced renewed downward pressure on Tuesday as weaker-than-expected Eurozone inflation data fueled dovish monetary policy expectations from the European Central Bank (ECB). In the wake of the inflation miss, traders are increasing their bets on a potential interest rate cut from the ECB this Thursday. 

As a result, the Euro (EUR) has continued to depreciate against the British Pound Sterling (GBP), dragging EUR/GBP to critical technical support levels. This article highlights NordaLueur’s in-depth broker insights on the topic.

Inflation Surprise Deepens Rate Cut Speculation

The key driver of the decline in EUR/GBP is the Eurozone’s preliminary Core Harmonized Index of Consumer Prices (HICP) for May. The core inflation figure, which excludes volatile items like food and energy, came in at 2.3% year-on-year, down from 2.7% in April and below the market consensus of 2.5%. 

This lower-than-expected reading suggests that inflationary pressures in the Euro area are subsiding more rapidly than previously anticipated.

With inflation moving closer to the ECB’s medium-term target of 2%, market participants are pricing in a 25-basis-point (bps) rate cut during the upcoming ECB policy meeting on Thursday. While policymakers have remained cautious about signaling the full extent of the easing cycle, softening inflation data lends credibility to the dovish narrative, reinforcing expectations for a more accommodative monetary policy stance going forward.

EUR/GBP Pressured by Diverging Central Bank Outlooks

In contrast to the ECB’s shifting stance, the Bank of England (BoE) appears more hesitant to follow suit in cutting rates. Recent UK economic data has surprised to the upside, and inflation in the UK remains relatively sticky, giving the BoE more policy flexibility to delay rate cuts. 

This monetary policy divergence between the Eurozone and the UK is placing additional pressure on EUR/GBP, as traders increasingly favor the Pound over the Euro on a relative yield basis.

With the BoE’s next policy meeting scheduled for June 19, the central bank is widely expected to hold interest rates steady, given the resilient performance of the British economy and concerns over persistent wage inflation. In contrast, the ECB may lead the rate-cutting cycle among major central banks, positioning the EUR at a disadvantage against the GBP.

Technical Breakdown: EUR/GBP Slides Toward 0.8400

From a technical perspective, the EUR/GBP pair has broken below key resistance and is now trading close to short-term moving average support. At the time of writing, EUR/GBP is hovering near the 10-day Simple Moving Average (SMA) at approximately 0.8415. This level represents immediate dynamic support, and a decisive close below it could signal further downside potential.

Importantly, EUR/GBP is also trading below the 78.6% Fibonacci retracement level of the March–September 2022 rally (from 0.8203 to 0.9254), with this retracement level acting as resistance at 0.8428. The failure to break above this resistance has reaffirmed the bearish bias, while the next psychological support at 0.8400 is now in focus.

A clean break below 0.8400 would likely expose the May low at 0.8356, which could be tested if bearish momentum gains strength. On the flip side, a rebound above 0.8415, followed by a reclaim of the 0.8428 resistance, could encourage buyers to push prices back toward Monday’s high of 0.8450.

Sentiment and Market Positioning

Investor sentiment is shifting in favor of GBP bulls, as expectations for a more hawkish BoE relative to the dovish ECB are becoming more entrenched. This view is supported by positioning data, with speculative traders increasing short EUR/GBP exposure. 

Additionally, the bond yield differential between UK and Eurozone government securities is beginning to widen again, further underpinning the GBP.

As we head into the second half of the week, volatility could rise significantly around the ECB decision. Markets will closely monitor the post-meeting press conference for any signals on the pace and depth of future cuts. If the ECB adopts an explicitly dovish tone and hints at a broader easing cycle, EUR/GBP could extend its decline and potentially retest year-to-date lows.

Conclusion: Bearish Bias as Divergence Widens

In summary, the EUR/GBP currency pair remains under downward pressure due to the growing policy divergence between the ECB and the BoE. The Eurozone’s soft inflation print has all but sealed the case for a rate cut on Thursday, while the UK’s stronger economic backdrop supports the case for the BoE to remain on hold.

Technically, EUR/GBP has breached important resistance-turned-support levels, and the proximity to 0.8400 suggests further downside could be imminent if bearish momentum persists. Traders and investors will stay focused on central bank communication, macroeconomic data releases, and technical breakouts, all of which will continue to shape the trajectory of this highly sensitive FX cross.