EUR/GBP Clings To Upbeat German Macro data And Moves Back Above 0.86700 Level

Key Takeaways:

• The EUR/GBP pair witnessed fresh buying during the Asian session and rebounded modestly to move back above the 0.86700 level 
• Upbeat German macro data extends support to the euro (EUR) 
• The divergence in monetary policy adoption between the European Central Bank (ECB) and the Bank of England (BoE) continues to undermine the cable

The EUR/GBP cross extended the overnight bounce from the 0.86702 - 0.86678 region and rose above the 0.86700 level during the second half of the Asian session on Tuesday.

The euro's (EUR) price modest pullback against the British Pound (GBP) on Tuesday could be attributed to the fresh positive euro macro data released on Monday. A German IFO Institute report on Monday showed the Business Climate indicator for Germany edged down to 85.7 in September 2023, slightly lower than August's revised figure of 85.8 but exceeding the market consensus of 85.2. Additionally, the Current Conditions indicator for Germany dropped to 88.7 in September 2023, down from August's 89.0 but exceeding the market consensus of 88.0.

Moreover, the euro (Euro) continues to be supported by the decision of the European Central Bank (ECB) mid-this month to raise its benchmark deposit rate to an all-time high of 4.5% after a record nine consecutive rate hikes since July 2022 and despite inflation declining in the eurozone area the previous month. A key reason for the ECB hike appeared to be the upward revisions in newly published staff macroeconomic projections for the euro area, which see inflation averaging at 5.6% in 2023 and 3.2% in 2024, both higher than previous estimates, primarily due to an elevated path for energy prices.

In contrast, the Bank of England (BoE) announced on Thursday that it had held its policy interest rate at 5.25%, keeping borrowing costs at their highest level since 2008, as policymakers opted for a wait-and-see approach following the latest inflation and labor data, which suggested that the accumulated impacts of previous policy tightening might be taking effect. It was the first pause in policy tightening in nearly two years, following the central bank's unprecedented 515 bps hikes. Policymakers further reiterated their commitment to tightening policy further if deemed necessary.  

That said, the divergence in monetary policy adoption between the European Central Bank (ECB) and the Bank of England (BoE) continues to undermine the cable and suggests the path of least resistance for the EUR/GBP pair is to the upside.

Further weighing on the British Pound (GBP) was the downbeat UK Office for National Statistics data report released on Friday, which showed retail sales in the United Kingdom fell by 1.4% in August on a year-to-year basis, marking the 17th consecutive month of decline but representing the slowest pace of contraction in the current sequence. Every month, retail sales in the UK rose by 0.4% from the previous month in August 2023, partially recovering from a fall of 1.1% in July and missing the market consensus of a 0.5% advance.

As we advance, market participants now look forward to second-tier Euro and UK economic data, which will influence the euro and British pound dynamics along with the broader market risk sentiment.

Technical Outlook: Four-Hour EUR/GBP Price Chart

From a technical perspective, the shared currency trades with modest gains above the 0.86700 level, following a modest bounce from the 0.86702-0.86678 region. If buyer momentum increases, the EUR/GBP cross price could ascend toward the 0.87013 resistance level (R1). A subsequent break above this barrier would set the shared currency price up for a 0.19% rally toward the next resistance level (R2) at the 0.87170 level, which sits below the key resistance level plotted by an ascending trendline extending from the early-September 2023 swing high. A convincing move above these barricades mentioned above would reaffirm the bullish bias and pave the way for more EUR/GBP cross gains.

On the flip side, if sellers overpower the bulls, the EUR/GBP price could drop to the key support level (P) at 0.86657. Acceptance below this level would see the shared currency price move toward the 0.86568 support level (S1). If sellers manage to breach this floor, the EUR/GBP price could accelerate its downfall to tag the 50-day (red) Exponential Moving Average (EMA) at the 0.86449 level and, in highly bearish cases, extend a leg down to the 0.86349 support level (S2), followed by the key support level plotted by an ascending trendline extending from the early-September 2023 swing low.