Following German data, EUR/GBP falls below 0.8600

On Wednesday, the Euro lost ground against its key competitors. Spain and Germany both posted inflation rates that fell short of market expectations. The 10-year yield on German bonds decreases and reaches weekly lows. After inflation data from Germany and Spain came in below the market consensus on Wednesday, the Euro fell against the US Dollar, the Japanese Yen, and the British Pound. Investors will be watching German retail sales data and European Union inflation data during the day on Thursday.

Weak inflation data puts pressure on the yields on German bonds. In May, the German Harmonised Index of Consumer Prices (HICP) slowed from its previous reading of 7.6% to 6.3% (YoY), falling short of the consensus estimate of 6.8%. In a similar vein, Spain reported on Tuesday that its HICP decreased to 2.9% from the anticipated 3.4%.

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. The lower inflation data has caused a decline in German rates throughout the curve. The 10-year bond yield decreased to 2.26%, down 4.18% on the day, while the 2-year yield is at 2.72%, down 3.41%, and the 5-year yield is at 2.39%, down 3.38%. In contrast, British yields are rising and the spread between the rates put more pressure on the pair, causing increases of more than 0.80% in the 2, 5 and 10-year notes.

Markets anticipate that on Thursday the EU’s HICP will have decreased even more from its previous reading of 7% to 6.3% (YoY) in May. German retail sales have decreased over the same time period, indicating that the country’s 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.

According to the daily chart, the EUR/GBP has a bearish view for the near future. The pair trades below its primary moving averages, indicating that the sellers are in control, and the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), both of which are in negative territory, are displaying weakness.

Support levels are aligned at the 0.8550 region and lower, at the 0.8545 region and the 0.8520 level, in case of additional decline. Resistance is set up at the 0.8600 level, then moves to the 0.8650 region and the 0.8700 region in the event that the EUR/GBP exchange rate consolidates gains.