Forex Market: EUR/GBP set to retest May 18th seven-week high as UK consumer inflation slows more than expected in April

EUR/GBP was on its way up for a retest of the seven-week high from May 18th during early European trade on Wednesday, after UK’s Office for National Statistics said annual consumer price inflation in the country had decelerated to its lowest level since August 2016.

The general Consumer Price Index increased 0.8% in April from a year ago, slowing down from a 1.5% year-on-year gain in March. Analysts on average had expected a slowdown in CPI inflation to 0.9%. Prices in the housing & utilities segment and cost of transport fell the most last month, weighing on the overall index.

At the same time, UK’s annual core consumer price inflation, which excludes prices of volatile categories such as energy, food, alcoholic beverages and tobacco, decelerated to 1.4% in April, or the lowest level since December 2019, from 1.6% in March. The median analyst estimate had pointed to a lesser slowdown to 1.5%.

The common currency remained in favor in early European trade on Wednesday also due to the proposal by Germany and France of a EUR 500 billion Recovery Fund, which may offer grants to countries and economic segments that have experienced the most severe impact from the coronavirus pandemic. The proposal is viewed as one step closer to a fiscal union, which could allow the EU to deal with economic imbalances within the block more efficiently. However, a final agreement has not been reached yet.

“It is a big step for large scale European fiscal support that Germany has changed its stance. But a EU-wide agreement still does not look easy,” Keiko Tasaka, senior economist at SMBC Nikko Securities, wrote in a client note.

As of 7:00 GMT on Wednesday EUR/GBP was gaining 0.36% to trade at 0.8948, rebounding from an intraday low of 0.8912.

Today euro traders will be paying close attention to the latest report on Eurozone’s consumer price inflation. Final data by Eurostat may show that the annual rate of inflation in the Euro area decelerated to 0.4% in April from 0.7% in March. If confirmed, it would be the lowest annual CPI inflation since September 2016. Final core CPI probably also met the preliminary estimate, rising 0.9% in April compared to April 2019 and slowing down from 1.0% in March. If confirmed, it would represent the lowest annual core inflation since August 2019. The official report is to be released at 9:00 GMT.

Bond Yield Spread

The spread between 2-year UK and 2-year German bond yields, which reflects the flow of funds in a short term, equaled 65.8 basis points (0.658%) as of 6:15 GMT on Wednesday. It has remained close to the five-year low from May 19th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.8925
R1 – 0.8949
R2 – 0.8981
R3 – 0.9004
R4 – 0.9027

S1 – 0.8893
S2 – 0.8870
S3 – 0.8838
S4 – 0.8806

EUR/GBP H1 chart presents a bullish configuration. Both the RSI and the MACD suggest that the pair still has some room to advance and test at least the high from May 18th (0.8960). A successful break above it may expose the high from March 31st (0.8973). Immediate support may be expected at the 20-period EMA (0.8928) and then, at today’s low of 0.8912.