EUR/GBP drops below 0.8600 after German data

• The Euro weakened against its major rivals on Wednesday
• Germany and Spain reported inflation figures below the market expectations
• German bond yields decline, with the 10-year yield falling to weekly lows. 
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The Euro lost ground against the US Dollar, Japanese Yen and the Sterling Pound on Wednesday following inflation data from Germany and Spain which came in below the market consensus. For Thursday’ session, investors will eye Retail Sales data from Germany and the inflation figures from the European Union (EU).

Weak inflation figures weight on the German Bond yields

The German Harmonized Index of Consumer Prices (HICP) from May decelerated to 6.3% (YoY) from its previous reading of 7.6% and below the consensus of 6.8%. Likewise, Spain reported on Tuesday that its HICP fell to 2.9% vs the 3.4% expected. 

Lower inflation means it is less likely the European Central Bank (ECB) will have to raise interest rates to quell surging prices. This would be negative for the Euro since global investors tend to prefer parking their money where interest rates are relatively higher. 

As a result of the lower inflation data, the German yields have weakened across the curve. The 10-year bond yield fell to 2.26% seeing 4.18% decrease on the day, while the 2-year yield stands at 2.72% with having lost 3.41% on the day, and the 5-year yielding 2.39% seeing a 3.38 % decline. Conversely, the British yields are edging higher and the divergence between the rates applied further pressure on the pair with the 2, 5 and 10-year seeing an increase of more than 0.80%.

For Thursday, markets are expecting the EU’s HICP to have further declined in May to 6.3% (YoY) from its previous figure of 7%. Retail sales from Germany have contracted in the same period of time and show that the German economic activity continues to weaken. This is a further indication the ECB could ease its monetary policy stance as long as inflation continues to fall – a negative for the Euro. 

Levels to watch

The EUR/GBP holds a bearish outlook for the short term, as per the daily chart. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both showing weakness standing in negative territory, and the pair trades below its main moving averages indicating that the sellers are in charge.

In case of further downside, support levels line up at the 0.8550 zone and below around the 0.8545 area and the 0.8520 level. In case the EUR/GBP exchange rate consolidates gains, resistance lines up at the 0.8600 level followed by the 0.8650 zone and the 0.8700 area.