The EUR/GBP pair edged higher during early European trading on Wednesday, approaching the 0.8650 level. The current market movement is primarily driven by a combination of heightened hawkish expectations for the European Central Bank (ECB) and weaker economic data from the UK.
Recent communications from the ECB have consistently leaned hawkish, reinforcing market expectations for future interest rate hikes. ECB official François Villeroy de Galhau stated on Tuesday that the ECB "will do what is necessary" to ensure inflation returns to target levels. Meanwhile, ECB Executive Board member Isabel Schnabel explicitly supported a further rate hike by the ECB in June. She noted that even if an agreement is reached between the US and Iran, the situation in the Middle East has persisted longer than previously expected, and high energy prices are gradually spreading to broader sectors of the economy. The market has now fully priced in expectations for two future ECB rate hikes. Additionally, the market even sees a nearly 50% probability of further ECB rate hikes within the next year.
Current market concerns revolve around persistently high international energy prices potentially reigniting inflationary pressures in the Eurozone. Particularly against the backdrop of ongoing tensions in the Strait of Hormuz, European energy costs face significant uncertainty. The Strait of Hormuz handles approximately 20% of global seaborne crude oil shipments. Therefore, developments in the Middle East significantly impact European energy markets and inflation expectations.
Some ECB officials believe that if energy prices continue to rise, the Eurozone could face more pronounced "second-round inflation effects," potentially forcing the ECB to maintain high-interest rates for a longer period. In contrast, recent economic data from the UK has been relatively weak, putting pressure on the British Pound.
UK inflation data for April unexpectedly declined, while the unemployment rate rose to 5.0%, indicating a slowdown in the UK's economic growth momentum. Consequently, the market has scaled back expectations for further interest rate hikes by the Bank of England. Traders have already reduced their bets on the number of BoE rate hikes in 2026, and UK government bond yields have also seen a notable decline.
Analysts suggest that the decline in UK gilt yields is primarily influenced by three factors: a retreat in international oil prices, improved expectations for political stability in the UK, and a reduction in uncertainty surrounding UK fiscal policy. The cooling of UK interest rate expectations has diminished the Pound's appeal. Simultaneously, the ECB's persistently hawkish stance is further bolstering the EUR/GBP pair.
However, the market maintains a degree of caution regarding the Eurozone's economic outlook. Given that overall economic growth in the Eurozone remains weak, the high-interest-rate environment may continue to pressure corporate financing and consumer demand. Investors are also closely monitoring the progress of US-Iran negotiations. If the Middle East situation significantly eases, international oil prices could decline, potentially alleviating European inflationary pressures and possibly reducing the necessity for the ECB to continue raising rates.
From a daily chart perspective, the EUR/GBP pair overall maintains a volatile but slightly stronger structure. The pair has recently consecutively held above both the 20-day and 50-day moving averages, indicating a gradual strengthening of the medium-term bullish trend. The MACD indicator has formed a golden cross again, with the red momentum bars continuing to expand, suggesting a recovery in bullish market forces. The RSI indicator remains around 58, indicating a bullish bias in market sentiment without entering overbought territory, implying further potential for upward movement. In terms of trend structure, the area around 0.8670 has become the first key resistance zone at the daily chart level, which also coincides with previous interim highs. A sustained breakout above this level could see the pair further test the area around 0.8720. On the downside, the area around 0.8610 has formed an interim support zone, which is also near the 20-day moving average. A break below this level could lead to a retest of the significant support near 0.8570.
Overall, the daily trend for EUR/GBP remains biased to the upside, although the 4-hour chart suggests the pair may be entering a consolidation phase at higher levels. Should the ECB continue to reinforce its hawkish stance while UK economic data remains weak, EUR/GBP could potentially move higher. However, a significant decline in international oil prices and a subsequent easing of European inflation pressures could limit further gains for the Euro.
Investors are currently focusing on speeches from ECB officials, UK economic data, and developments in the Middle East. The market is also continuously monitoring changes in international energy prices, as these will directly influence the future policy paths of both the ECB and the Bank of England.