EUR/GBP gains momentum as EU inflation data tampers ECB dovish expectations

• EUR/GBP rose sharply on Friday at 0.8531, notching a 0.26% gain.
• Inflation data from the Eurozone, both headline and core HICP, exceeded the forecasts.
• A cut in June by the ECB seems already priced in, but hot inflation figures may impact the timing of the rest of the easing cycle.

The EUR/GBP pair is riding high on robust European Union (EU) inflation data, surpassing expectations and shifting market expectations away from the dovish view of the European Central Bank (ECB).

The inflation trend witnessed in the Eurozone is a critical driver currently dominating the FX markets, overriding the ECB's dovish undertone. Spain's HICP data further influenced the pair's gains, coming in a tick higher than expected at 3.8% YoY against the previous 3.4%. Germany's Harmonised rate, too, picked up to 2.8% YoY, outpacing April's 2.4%. Similarly, the EU’s block figures rose by 2.6% YoY for headline and 2.9% for the core measure both beating expectations.

These figures indicate unanticipated inflation pressures, potentially nudging the ECB to reconsider its dovish stance. In that sense, the talk in the next sessions will be on how aggressively the bank will take the easing cycle following a 25 bps cut already priced in June.

EUR/GBP technical analysis

In the daily analysis, the Relative Strength Index (RSI) hovers in negative territory, signifying considerable seller dominance over the past sessions. Furthermore, despite a slight rise from its near-oversold condition, the RSI still lingers below 50, indicating a possible continuing downward trend. The Moving Average Convergence Divergence (MACD) histogram reveals a series of decreasing red bars, implying a consistent negative momentum and validating the current bearish market sentiment.

EUR/GBP daily chart

Adding to this bearish sentiment, the EUR/GBP is trading beneath three crucial Simple Moving Average (SMA) of the 20, 100, and 200-day. This positioning typically signals a bearish market condition, with further downward trends and potential additional price drops on the horizon.