Despite a challenging macroeconomic backdrop, with less than stellar survey and hard data in the Eurozone, the euro (EUR) has proven resilient in recent weeks.
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- Despite a challenging macroeconomic backdrop, with less than stellar survey and hard data in the Eurozone, the euro (EUR) has proven resilient in recent weeks.
- This resilience can continue into year-end.
- As outlined in our piece last week, our least-favoured G10 currency is sterling (GBP). We therefore think that EUR/GBP can trade back to its year-to-date (YTD) high near 0.9000.
- We also think EUR/SEK has upside potential in the coming months, with the pair to trade to a new YTD high above 12.
Despite the increasingly negative prognostications for the Eurozone economy, the euro has proven surprisingly resilient.
Against the US dollar, after making a marginal new YTD low on 3 October at ~1.0450, EUR/USD has bounced and now trades near the middle of this month’s ~1.0450/1.0700 range.
And while EUR/USD’s trajectory into year-end is far from clear, we think that two euro pairs, EUR/GBP and EUR/SEK, have room to trade to new YTD highs in the coming weeks.
EUR/GBP to Trade Higher
We outlined our broadly bearish GBP view in our piece last week.
We think market pricing for the Bank of England (BoE) is far too hawkish, and that there is still room for UK yields to fall further, as they have in recent weeks. The UK short-end has been our favoured position across the G10 rates space, and we have been received the UK short-end for several weeks now.
UK economic data supports this view, and in last week’s piece we highlighted the loose jobs market and dovish details within the UK inflation data.
Since then, additional UK data has come in notably below expectations.
September retail sales were much weaker than expected, with measures including and excluding auto fuel falling sharply both MoM and YoY. Also, consumer confidence plummeted by the most since the pandemic began – strong evidence of the squeeze on UK households.
On Tuesday, October flash UK PMI data remained below 50, implying economic contraction, with the services sector showing additional weakness. The services sector decline was the strongest since January, with subdued consumer confidence cited as a drag.
All of this increases our conviction of GBP downside in the coming weeks and months. In addition to the short GBP/USD and GBP/CAD exposure we outlined last week, we also think that EUR/GBP has additional upside into year-end.
EUR/GBP can trade back to the YTD high, just below 0.9000.
Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.
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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)