Sterling Steadies After Political Jolt as EUR Crosses Reach Key Technical Levels

Markets head into the European open with politics and bond markets driving sentiment after a turbulent start to the UK's new government. Sterling has recovered some of yesterday's losses overnight, but investors will be watching whether UK gilts can stabilise after yesterday's sell-off. Meanwhile, both EUR/USD and EUR/GBP are approaching key technical levels that could shape the next move.

EUR/USD Losing Momentum as 1.1400 Comes Into Focus

EUR/USD remains within its broader rising channel, but momentum is beginning to fade after another rejection from the upper boundary. The pair has started to rotate lower, bringing the 1.1400 area firmly into focus.

Fundamentally, the euro's rally is showing signs of running out of steam. Rate differentials have helped support the move higher, but with markets already pricing around 44bp of ECB easing by year-end, there appears to be limited room for further hawkish repricing. If expectations begin to soften, the euro could struggle to maintain its recent strength.

Today's German ZEW survey will be one to watch, with economists expecting improvements in both the expectations and current conditions components. A stronger-than-expected release could help stabilise the euro, while disappointment may add further pressure on the single currency.

Technical Takeaway

The recent price action suggests EUR/USD is beginning to break lower from a developing bear flag formation. Initial support comes in around 1.1380, where the lower boundary of the rising channel also sits. A sustained move below that level would expose the June low near 1.1330, making 1.1380 the key level to watch through today's session.

EUR/GBP Breakout Holds as Markets Assess UK Fiscal Outlook

EUR/GBP has confirmed a bullish breakout from its month-long consolidation range, shifting the near-term bias higher even as the pair continues to trade within its broader descending channel.

Sterling came under pressure after Prime Minister Andy Burnham indicated he would make use of flexibility within the UK's fiscal rules, prompting UK 10-year gilts to underperform their European counterparts. Attention now turns to the bond market's response following the surprise appointment of John Healey as Chancellor, although the relatively muted reaction in sterling suggests markets see little difference between Healey and the previously expected frontrunner. Investors continue to expect Burnham himself to remain the driving force behind economic policy.

This morning's stronger UK labour market data has helped the pound recover some ground, but the gilt market remains the bigger story. Unless bonds begin to stabilise, sterling may struggle to regain the momentum it enjoyed before yesterday's political headlines.

Technical Takeaway

EUR/GBP has found support from the lower boundary of its longer-term descending channel, with buyers stepping back in after the recent breakout. The next upside level to watch sits around 0.8620. A move above there would strengthen the case for further gains towards the upper boundary of the channel, particularly if political uncertainty continues to weigh on sterling.