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EUR: Focus on inflation this week.
The Eurozone's PMI figures, released last Friday, slightly exceeded expectations, but they still indicated a significant contraction in economic activity. This has raised concerns about the possibility of negative GDP growth in the second half of the year. CFTC data reveals that net long positions in EUR/USD have been reduced even further, falling below 15% of open interest for the first time since October 2022 in the week leading up to the Federal Reserve (Fed) meeting. The Fed's hawkish stance and the absence of positive economic news from the eurozone likely encouraged speculators to continue unwinding their long euro positions.
Later this week, the eurozone's Consumer Price Index (CPI) releases could be a critical event for the euro. A surprise increase in CPI could rejuvenate expectations for another European Central Bank (ECB) interest rate hike this year.
However, unless there is a bullish CPI outcome for the euro, it appears that EUR/USD is poised to test the 1.0600 level, with the risk leaning towards a drop to 1.0500 in the short term. Nevertheless, the euro's responsiveness to ECB speakers has been relatively muted recently.
GBP: Weak PMIs suggest rates have peaked.
The British pound is on course to be the weakest among G10 currencies in the third quarter. This decline has been driven by a significant adjustment in expectations for domestic interest rates, following the Bank of England's decision to pause its rate hikes. The PMI data released on Friday unequivocally justified the BoE's choice to keep rates unchanged, as the numbers were lower than anticipated and signalled greater economic challenges for the UK in the third quarter.
Prior to the November meeting, the Bank of England will receive one more set of inflation and wage data. However, economics team from ING now predicts that the central bank will maintain its current stance, signalling the end of the tightening cycle in the UK. Market sentiment aligns with this projection, with only a 25% chance of a rate hike in November and a 50% probability of an increase by December.
This week, the UK is not slated to release any major economic data, aside from the final second-quarter GDP figures. Additionally, there are only two scheduled speakers from the Bank of England. While EUR/GBP has surged to 0.8700, it may struggle to maintain these gains, primarily because a substantial portion of the dovish adjustment in the Sonia curve has already occurred. Moreover, the euro's momentum is currently subdued. In the case of GBP/USD (Cable), the risks are tilted toward a test of the crucial 1.2000 level soon if the US dollar remains strong.
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