EUR/GBP hovers near 0.8670 as ECB, BoE events loom and UK fiscal risks rise

• ECB seen holding rates steady this week, with 38% chance of a cut.
• UK inflation hits 1-year high, but BoE still expected to ease by 25 bps in August.
• EU prepares retaliation plan as trade tensions with US threaten to escalate.

The shared currency remains steady against the British Pound on Monday, ahead of a busy week as traders await the monetary policy decision by the European Central Bank (ECB) and a speech by Bank of England (BoE) Governor Andrew Bailey. At the time of writing, the pair trades at 0.8670, virtually unchanged.

Shared currency awaits the ECB decision and Bailey speech; UK rate cut bets grow despite inflation jump

This week, the ECB is expected to keep rates unchanged, according to interest rate probabilities, which show a 62% chance. The odds of a rate cut lie at 38%, according to data from Prime Market Terminal.

Trade news revealed that the EU envoys are set to meet as early as this week to formalize a retaliation plan in the event of a possible no-deal scenario with US President Trump, according to Bloomberg.

Last week, the UK's economic data was mixed, with a cooling labor market, but inflation unexpectedly rose to its highest level in more than a year. Despite these contrasts, the money market expects a 25-basis-point (bps) rate cut from the BoE at the August 7 meeting, followed by 50 bps of easing towards the end of the year.

Analysts at Goldman Sachs revealed, "We think a rising fiscal risk premium is the main driver of the recent outperformance of EUR/GBP."

The UK fiscal position is risky after the parliament triggered a U-turn on welfare reforms, increasing doubts about the government's ability to reduce spending. After that, most economists suggest the government needs to raise taxes to meet its fiscal rules and achieve its growth targets.

EUR/GBP Price Forecast: Technical forecast

The EUR/GBP remains consolidated, though the break of a resistance trendline drawn from the current year's peak of 0.8738 that passes near 0.8650 was decisively broken, clearing the path for further upside. The Relative Strength Index (RSI) indicates that momentum remains bullish, despite the slope becoming flat.

For a bullish continuation, traders need to surpass the 0.8700 figure so that they can challenge the year-to-date (YTD) high of 0.8738. A breach of the latter will expose 0.8750 and 0.8800. On the other hand, if EUR/GBP falls below 0.8650, expect a decline toward the 20-day SMA at 0.8617, followed by a potential drop to 0.8600.