The EUR/GBP currency pair is on track to finish the week in negative territory for the third consecutive week, driven by a weakening euro as market participants anticipate another rate cut from the European Central Bank (ECB) in September. This expectation has gained momentum following the release of the Flash Eurozone Harmonized Index of Consumer Prices (HICP) report for August, which showed a continued decline in inflationary pressures within the Eurozone.

The report revealed that headline inflation dropped to 2.2%, while core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, fell to 2.8%. Despite a month-on-month increase of 0.3% in core HICP after a contraction in July, the data supports the view that the ECB will likely reduce its key borrowing rates next month.

The ECB’s concerns are compounded by the risk of a potential recession in Germany, the Eurozone’s largest economy. The German HICP also returned to the ECB’s target of 2% in August, further fueling speculation of a rate cut. Carsten Brzeski, ING’s global head of macro, noted that the combination of fading inflationary pressures and slowing growth creates an ideal environment for another ECB rate cut.

On the other hand, the British pound sterling has shown considerable strength against its major counterparts, supported by expectations that the Bank of England (BoE) will take a slower approach to policy easing. While the BoE is anticipated to cut interest rates one more time this year, it has been cautious in its policy adjustments, having pivoted to normalization in its most recent meeting on August 1.

Trade Idea:

Consider shorting EUR/GBP around 0.8450, targeting 0.8375 with a stop-loss at 0.8490, to take advantage of the ongoing euro weakness driven by the anticipation of ECB rate cuts and the relative strength of GBP, supported by a slower policy-easing outlook from the BoE.