The British pound managed to hold steady against the US dollar in Tuesday's early trade following the news about a continued rise in UK consumer prices, while the euro resumed its decline, weighed down by cooling inflation in Spain.
According to the latest data, inflation in Spain slowed down more than expected. This news supported officials of the European Central Bank who say the continent's historic price spike is fading and interest-rate increases can soon end.
he report showed that inflation dropped to 2.9% in May, the lowest level since July 2021, as fuel costs decreased and the growth in food prices eased. The result followed April's rise to 3.8% and was well below the average estimate of 3.3%.
Spain's core inflation, which excludes energy costs and some food items, also decreased for the third consecutive month, though it remained elevated at 6.1%. Against this backdrop, Eurozone government bonds advanced, extending Monday's rally. The yield on Spain's 10-year government bonds fell by 3 basis points to 3.47%.
Notably, inflation data for Spain is the first in a raft of consumer price releases from the region. Statistics from France, Italy, and Germany will be released on Wednesday before the euro area publishes its own figures.
Spain has of late boasted by far the slowest inflation among the largest economies in Europe. While ECB officials are closely monitoring this indicator as a guide to when to conclude their unprecedented campaign to tighten monetary policy, economists and investors expect at least two more quarter-point rate hikes this summer. Some policymakers believe that the regulator will keep lifting rates until September, pushing the deposit rate from the current 3.25% to 4%.
Against this background, the euro slid. From a technical point of view, the bearish trend remains intact. To resume gains, bulls need to defend 1.0670 and take control of 1.0720. In this case, the euro will have a chance of climbing to 1.0755 and probably 1.0790. However, it will be quite challenging without strong fundamental drivers from the euro area. In the case of a decline, major buyers are expected to take the lead only at around 1.0670. Alternatively, it would be a wise decision to wait for the price to hit a new low at 1.0635, or go long at 1.0595.
As for the situation in the United Kingdom, data showed that prices in British stores continued to rise at record rates as the cost of living crisis shows no sign of abating. Shop price inflation has accelerated to 9% this month, notching a new peak for the index. Moreover, it is well above the previous peak of 8.8% posted in April.
Experts note that there are signs that inflation is becoming entrenched in the UK and that Brexit has exacerbated the cost-of-living crisis. Consumers are prioritizing their spending on food and utility bills while cutting back wherever possible. The report states that in order to mitigate the impact of inflation, buyers are saving money by seeking seasonal promotions and taking advantage of price reductions.
As for the overall inflation level, as shown by last week's data, it remains much stronger than expected, with the fastest rise in service prices fueling expectations of further interest rate hikes by the Bank of England. According to Britain's Chancellor of the Exchequer Jeremy Hunt, he supports higher interest rates to combat inflation, even if it provokes a recession.
This news helped the British pound hold steady in today's early trade. However, when it comes to the overall technical picture, the pound/dollar pair remains under pressure. An advance is possible only after bulls regain control of the 1.2350 mark. Its breakout will allow sterling to recover to 1.2390 and 1.2430. In this case, the way to 1.2470 will open. In case of a slide, bears will try to break through 1.2370. If they succeed, the British pound will most likely dive to the low of 1.2270 and probably reach 1.2230.
