EUR/GBP remains on the defensive around mid-0.8500s, Thursday’s ECB meeting in focus

• EUR/GBP turns lower for the second straight day, though the downside seems limited.
• Expectations for more aggressive BoE tightening underpin the GBP and exert pressure.
• Bears might refrain from placing aggressive bets ahead of the ECB meeting on Thursday.

The EUR/GBP cross extends the overnight retracement slide from the 0.8610-0.8615 supply zone and edges lower for the second successive day on Wednesday. Spot prices remain on the defensive through the early part of the European session and currently trade around mid-0.8600s, down nearly 0.10% for the day.

The British Pound (GBP) continues to draw support from expectations that the Bank of England (BoE) will be far more aggressive in policy tightening to contain stubbornly high inflation and acts as a headwind for the EUR/GBP cross. In fact, the markets seem convinced that the UK central bank will hike interest rates by 25 bps on June 22 and the bets were reaffirmed by the upbeat UK employment details released on Tuesday. The UK Office for National Statistics (ONS) reported that the ILO Unemployment Rate unexpectedly dipped to 3.8% in the quarter to April from the 3.9% previous. Furthermore, the Claimant Count Change also showed a bigger-than-expected decline of 13.6K in May. Adding to this, the jump in UK wages, which is a key driver of inflation, poses concerns for the BoE.

Commenting on the data, BoE Governor Andrew Bailey, speaking before the House of Lords Economic Affairs Committee, noted that the UK labor market is very tight and recovering slowly. Separately, BoE policymaker Catherine Mann said on Tuesday that wage increases of 4.0% would be a challenge to returning CPI to 2.0%. Meanwhile, official data showed this Wednesday that the UK economy returned to growth in April and expanded by 0.2% after recording a 0.3% contraction in the previous month. This, to a larger extent, overshadows the disappointing release of UK Manufacturing/Industrial Production figures. Nevertheless,  the prospects for further tightening by the BoE continue to offer support to the GBP and weigh on the EUR/GBP cross, though the downside seems cushioned, at least for now.

Traders might refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the key central bank event risk - the European Central Bank (ECB) meeting on Thursday. The recent hawkish comments by a slew of influential ECB officials suggest that this is still a way to go to raise borrowing costs despite a fall in the headline Eurozone CPI to 6.1% in May. Moreover, ECB President Christine Lagarde indicated last week that additional interest rate rises were likely as, so far, there was no clear evidence that underlying inflation has peaked. This could underpin the shared currency and lend support to the EUR/GBP cross, making it prudent to wait for some follow-through selling below the YTD low, around the 0.8535 region touched on Monday, before positioning for any further losses.

Technical levels to watch