EUR/GBP is trading lower around 0.8550 during Monday's European session, struggling to hold its ground following the release of disappointing data from the Eurozone and Germany. As mentioned, Germany's trade balance for July fell to EUR15.9 billion, down from the expected EUR18.0 billion, down from EUR18.7 billion in the previous month. Along with that, Sentix Eurozone Investor Confidence (September) posted a 21.5 decline from the previous 18.9.
Additional tightening of monetary policy
In addition, the currency pair is facing downward pressure as investors are cautious as they fear that additional monetary tightening by the European Central Bank (ECB) could potentially push the Eurozone economy into recession.
Traders are awaiting a speech by ECB President Christine Lagarde during a press conference scheduled for Monday (04.09.2023). During this conference, Lagarde may provide insight into the ECB's assessment of the current and future state of the Eurozone economy.
ECB Governing Council member Pierre Wunsch highlighted the prevailing inflation as a factor supporting the need for further monetary tightening. During a Saturday radio interview broadcast by Bloomberg, Pierre said, "I'm inclined to think that we may have to take further action."
Traders have taken a cautious stance
Conversely, EUR/GBP traders appear to have adopted a cautious stance given the challenging economic conditions prevailing in the United Kingdom (UK). The hawkish expectations raise concerns over the potential negative impact on the UK economy due to further interest rate hikes during the Bank of England's (BoE) September meeting.
Price action appears to have reversed in the middle of a broader range (0.8515 - 0.8650), currently testing support at 0.8565. Adding to the sell-off in the euro is the fact that the markets have already priced in a 70% change in the interest rate with no rate change at next month's ECB rate-setting committee meeting, up from the 50/50 seen earlier in the week.
In addition, ECB "sources" ahead of ECB President Christine Lagarde's speech in Jackson Hole indicated that the committee is taking a dovish view of additional rate hikes.
Support at 0.8565 is the current level being tested, with 0.8515 potentially the next level to break.
