EUR & GBP – All You Need to Know

EUR: Pessimism reigns

The recent release of flash PMIs for August had a notable impact on the markets. The euro, as measured by the ECB's trade-weighted index, experienced a decline of approximately 0.5%. Additionally, the EUR/USD swap differential for the two-year period widened significantly by 10 basis points during the day. This brought the differential to around 145 basis points in favor of the dollar, reaching levels not seen since March. This shift indicates a clear negative trend for the EUR/USD pair.

The EUR/USD pair's test of the 200-day moving average at 1.0800 yesterday appeared to be well-founded. If it weren't for the revisions in US payroll data, the EUR/USD pair would likely be trading much closer to 1.0800 during the current European morning.

Although there has been limited communication from ECB speakers recently (with President Christine Lagarde scheduled to speak late tomorrow), market confidence in the central bank's ability to execute another rate hike before the decline in eurozone economic activity concludes the tightening cycle is diminishing rapidly. This situation is hindering the argument for the EUR/USD pair to swiftly return above 1.10.

In the immediate future, the expected range for EUR/USD seems to be between 1.0800 and 1.0700. Despite a slightly improved risk sentiment today, it's unlikely that investors will aggressively drive the EUR/USD pair much higher. Unless there is a significant and sudden increase in US initial jobless claims, the EUR/USD pair could very well drift back towards the 1.0800 level.

GBP: Short term rates remain the key driver.

Yesterday's movements in the EUR/GBP exchange rate conveyed significant information. Initially, EUR/GBP experienced a brief drop below 0.8500 due to the release of disappointing eurozone PMI data. However, the currency pair quickly rebounded to 0.8565 following the release of weak UK services PMI data. The lacklustre economic data from the UK caused a notable decline of 15 basis points in the expectations for the Bank of England's (BoE) tightening cycle. Despite this, we maintain our view that the BoE is unlikely to fulfill the 60 basis points of tightening that the market currently anticipates. As a result, we believe that EUR/GBP has the potential to return to the 0.87 range later in the year.

I anticipate that EUR/GBP will continue to trade within the range of 0.8500 to 0.8550.

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