• EUR/GBP softens to around 0.8570 in Tuesday’s early European session. 
• Germany’s Retail Sales fell by 3.4% MoM in July, weaker than expected. 
• BoE’s Bailey saw ‘subdued’ second-round inflation effects for now. 

The EUR/GBP cross loses traction to near 0.8570 during the early European trading hours on Tuesday. The Euro (EUR) edges slightly lower following German Retail Sales data. Traders brace for the preliminary reading of the Eurozone August Harmonized Index of Consumer Prices (HICP), which will be published later on Tuesday. 

Data released by Destatis on Tuesday showed that German Retail Sales, a key measure of consumer spending, fell by 3.4% MoM in July, compared to 0% in June (revised from -1.1%). This figure came in weaker than the market expectations of a 0.4% rise. On an annualized basis, Retail Sales dropped 2.5% in July, versus a 0.2% decline prior. 

The European Central Bank (ECB) policymakers have lifted borrowing costs once and are set to hike again at the upcoming policy meeting on September 10. Traders are betting on monetary policy being tightened further still next year.

On the UK’s front, Bank of England (BoE) Governor Andrew Bailey played down the inflation threat, saying that the UK is not yet experiencing significant second-round inflation effects. 

“We’re seeing quite subdued second-round effects; I think we’ve seen a softening labor market for some time now,” said Bailey. “I’ve taken the view that I think we can watch this situation for the moment,” he added. 

Markets are fully pricing in a quarter-point increase this year and another by the spring, according to Bloomberg. 

Uk fiscal discipline faces rising security and defense demands

BNY’s Geoff Yu highlights that the new Labour administration’s commitment to fiscal discipline is complicated by evolving security needs. He argues that “the broader policy challenge is balancing tighter fiscal constraints with growing defense and resilience demands, as the U.K. responds to higher security risks, hybrid threats and pressure to increase military preparedness without undermining confidence in the public finances.” This tension between budgetary restraint and heightened defense requirements is becoming a key consideration for investors in UK assets and the Pound.

Technical Analysis: EUR/GBP retains a bearish vibe under the 100-day SMA

In the daily chart, EUR/GBP maintains a mildly bearish, capped tone as it holds beneath the 20-day Bollinger simple moving average and the 100-day moving average. The cross is hovering closer to the mid-band than the lower band, while the Relative Strength Index (14) around 53 suggests neutral-to-slightly positive momentum that has yet to overcome the overhead moving-average structure.

On the topside, initial resistance emerges at the 20-day Bollinger middle band at 0.8560, ahead of the upper Bollinger band near 0.8585 and the more significant 100-day moving average at 0.8605. On the downside, the next notable support is aligned with the 20-day Bollinger lower band around 0.8535, where buyers could attempt to slow any extension of the recent pullback.