The EUR/USD and EUR/GBP exchange rates continued their downward trend ahead of the important European Central Bank (ECB) decision and inflation report. The EUR/GBP pair fell to 0.8330, its lowest point since Oct. 3, while the EUR/USD plunged to the two-month low of 1.0890.
ECB interest rate decision
The euro has weakened drastically against other currencies like the US dollar, Swiss franc, and the British pound as the bloc’s economic deterioration continued.
Reports released this week showed that inflation in key countries like France and Spain dropped below the ECB’s target of 2.0% in September.
In Sweden, the headline Consumer Price Index (CPI) fell from 1.9% in August to 1.6% in September. Similarly, in France and Spain, the headline figures dropped from 1.8% to 1.1%, and from 2.3% to 1.5%.
Inflation in other European countries has moved below the 2% target. Analysts expect the CPI data to be released on Thursday will show that the bloc’s inflation fell to 1.8% in September.
The ECB has won its battle against inflation, which peaked at 10.6% in 2022. Therefore, it needs to ensure that the bloc does not move to a deflation, which may affect consumer spending as they wait for prices to keep falling.
There are signs that the bloc’s economy is not doing well as key countries struggle. In a recent report, German researchers said that the economy will shrink this year before crawling back in 2025.
Many large German companies are struggling. For example, Volkswagen, one of the country’s top employers said that it may start to close factories for the first time in decades. Other companies like ThyssenKrupp and BASF have started cutting jobs in the country.
There are also concerns about the bloc’s jobs environment as the economic slowdown continues. The unemployment rate remains at 6.4%, while wage growth has stalled in the past few months.
Therefore, analysts expect the ECB to continue cutting interest rates on Thursday. The base case is that it will slash rates by 0.25%, and maintain a dovish tone. These rate cuts will help it increase liquidity in the bloc and lead to more growth in the near term.
UK inflation data ahead
The EUR/GBP exchange rate will react to the upcoming UK inflation data, scheduled for Wednesday.
Economists polled by Reuters expect the data to confirm that the UK inflation continued falling in September.
The headline CPI is expected to fall from 0.3% to 0.2%, and from 2.2% to 1.9% on a month-on-month and year-on-year basis.
Core inflation, which excludes the volatile food and energy prices, is expected to drop from 0.4% to 0.3% and from 3.6% to 3.4%.
If these numbers are correct, they will mean that the Bank of England has also won its inflation battle.
As such, the bank will maintain its relatively dovish tone and possibly cut interest rates in the next meeting in November.
The BoE, under Andrew Bailey, has been fairly cautious when cutting rates such that it left them unchanged in the last meeting, which explains why the EUR to GBP pair has slumped.
EUR/GBP technical analysis
The EUR/GBP exchange rate has been in a strong downward trend this year. It peaked at 0.8765 in January and then fell to 0.8330 this week. Its attempts to rebound in September found a strong resistance at 0.8625.
The pair has formed a descending channel pattern and moved below the 50-day and 100-day Weighted Moving Averages (WMA).
Also, the MACD has moved below the zero line, while the Relative Strength Index (RSI) has crashed below the neutral point at 50.
Therefore, the path of the least resistance for the pair is bearish as the UK interest rates remain higher than those in the EU. A drop below the year-to-date low of 0.8312 will point to more drops in the near term.
EUR/USD forecast
The EUR/USD pair has also slumped because US interest rates remain higher than those in Europe. It has also slumped because of the rising hopes that Donald Trump will win the US election in November.
In an interview with Bloomberg on Tuesday, Trump reiterated his threat to impose more tariffs, opening door to more global tensions.
On the daily chart, the pair formed a double-top pattern at 1.1200, and recently moved below its neckline at 1.100.
It has also crashed below the key support at 1.0980, its highest level in March 2024. The pair has moved below the 50-day and 100-day WMA, while the MACD and the RSI have pointed downwards.
Therefore, the pair will likely continue falling as traders target the next key support at 1.0800, which connects the lowest levels since October 2023. This is an important level since it connects the lowest swings since August.
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