EUR/GBP witnessed heavy selling during the early part of the European session on Tuesday.
Hawkish BoE signals helped revive the GBP demand and prompted selling around the cross.
Disappointing ZEW Survey results weighed on the euro and contributed to the intraday slide.
The EUR/GBP cross faded an early European session bullish spike to three-day tops and dropped to fresh daily lows, back below the key 0.8500 psychological mark in the last hour.
The cross gained some positive traction during the first half of the trading action on Tuesday, albeit struggled to capitalize on the move and witnessed an intraday turnaround from the 0.8520 area. A sudden pickup in demand for the British pound turned out to be a key factor that prompted aggressive selling around the EUR/GBP cross.
Over the weekend, the Bank of England (BoE) officials, including Governor Andrew Bailey, signalled an imminent interest rate later this year. The money market seems to have fully priced in a 25bps BoE rate hike in December. This was evident from a spike in the UK 10-year gilt yield, which rose to the highest level since May 2019, at 1.222% on Monday.
On the other hand, the European Central Bank (ECB) chief economist Philip Lane said that the medium-term inflation dynamic is too slow and that the trigger for monetary policy action is not there. This widened the UK-German 10-year bond yield differential to the highest since mid-2016, favouring the GBP bulls and acting as a headwind for the EUR/GBP cross.
Apart from this, worsening economic sentiment in the Eurozone’s largest economy – Germany – undermined the shared currency and contributed to the EUR/GBP pair’s sudden fall over the past hour or so. In fact, the German ZEW Economic Sentiment Index fell to 22.3 from 26.5 previous and missed consensus estimates pointing to a reading of 24.0.
That said, a modest US dollar weakness extended some support to the euro and helped limit any deeper losses for the EUR/GBP cross, at least for the time being. Nevertheless, the fundamental backdrop seems tilted in favour of bearish traders and supports prospects for an extension of the recent sharp pullback from the very important 200-day SMA.