EUR/GBP Price May Correct Higher

The EU & UK Agreement– A Step in the Right Direction

The European Union and the United Kingdom have announced an agreement that could mark the beginning of a new phase in their relationship. Under the deal, the UK commits to adopting EU standards for food and agricultural products, aiming to eliminate the need for European inspections and customs checks. In return, European fishing vessels will be granted access to British waters for 12 years.

Notably, the EU remains hesitant to offer the UK a relationship akin to its arrangement with Switzerland, which covers the alignment of standards across all goods—not just agricultural ones. However, Switzerland contributes to the EU budget and permits the free movement of people, conditions Britain has resisted so far, particularly after the EU’s request for free movement for young people. This would require the UK to relinquish certain immigration controls regained post-Brexit.

While this agreement represents progress, its economic impact is limited and falls short of significantly improving UK growth prospects. That said, it may serve as a stepping stone toward ending the frosty relationship between the two sides. With mutual concessions, broader agreements could follow, benefiting both economies.

Two Interest Rate Cuts Expected This Year in the UK and Eurozone

UK Consumer Price Index data for April surprised to the upside, showing a 0.9% monthly increase, pushing annual inflation from 2.6% in March to 3.5%. As a result, the Bank of England is unlikely to change interest rates at its June meeting.

The jump in service-sector inflation (from 4.7% to 5.4%) was a key contributor, largely driven by a spike in holiday and travel ticket prices during the Easter season. This surge is viewed as temporary and not sustainable. Therefore, the Bank of England is expected to maintain a gradual and cautious rate-cutting approach, depending on data developments. A rate cut could be delayed until the August meeting, with another cut likely in November.

Meanwhile, the European Central Bank is also expected to continue easing monetary policy, driven by a notable drop in inflation, which may enable two rate cuts before year-end.

EUR/GBP Pair Reverses Course

On April 21, the EUR/GBP pair ended its upward trend after forming a lower high at 0.8622, initiating a downtrend characterized by lower highs and lower lows. By mid-May, the pair hit its lowest level in several weeks but rebounded near the low end of its current trading zone located between 0.8384 and 0.8595. A short-term correction may see the pair trade sideways toward the high end of the mentioned trading zone.

A daily close above the high end of the zone would signal renewed bullish momentum, potentially pushing the pair toward 0.8852. However, resistance levels at 0.8640, 0.8720, and 0.8811 must be closely monitored along the way.

Levels to Consider in the Opposite Scenario

A daily close below the low end of the trading zone would signal strong bearish pressure and could lead to a further decline toward 0.8222. In this case, the support zone between 0.8277 and 0.8246 should be carefully watched.

EUR/GBP price – Daily Chart

Chart Source: ADSS Platform