[MARTKET REPORT] Euro hots up battle with British pound

The continuing contradiction of economic sentiment for the EU and United Kingdom remains in focus, with the EURGBP reaching a fresh 22 month low following Mario Draghi’s dovishly perceived press conference on Thursday afternoon.

Currently, the pair is battling to extend below the 0.7915 support level and the next 24-48 hour period is likely critical towards whether the bears can win this battle.

Tuesday will likely be a busy day for this pair. Early in the morning, the latest Germany Trade Balance is announced. Usually, Germany (around 30% of the EU GDP) is the European Union’s consistent go-to country for a shining light in a currently overcast economic climate.

Unfortunately, Germany is now raising a few eyebrows themselves with an unusually increased quantity of recently disappointing economic releases.

In the past fortnight alone, German economic disappointments have included IFO readings falling below expectations, a reduction in domestic retail sales and an unexpected decline in German Factory Orders.

If Germany’s Trade Balance proves a disappointment, further EURGBP momentum will be awarded to the bears in this battle to extend below 0.7915.

Also on Tuesday, the latest annualised manufacturing production statistics are released from the United Kingdom.

A contributing cause towards the recent GBP rally followed the announcement that UK manufacturing PMIs advanced to a yearly high in June.

Manufacturing is a sector pinpointed as a key target for future UK job growth and is now flourishing, according to PMI survey complier, Markit.

Confirmation of Tuesday’s manufacturing output succeeding expectations would likely signify further bearish pressure for the EURGBP.

Although the battle to extend below 0.7915 might currently seem like a matter of “when” rather than “if”, further downward moves towards the August 2012 low of 0.7830 are far from inevitable.

A move lower to this level would likely be dependent on both a collaboration of a disappointing Germany Trade Balance release diminishing demand for the EU currency, alongside an impressive UK manufacturing performance extending the GBP rally.

By Thursday, some sort of EURGBP recovery/consolidation period is possible. With the BoE extremely unlikely to raise rates this Thursday, demand for the GBP could come to a pause as the week develops.

Recently, BoE Governor Carney seemingly backtracked on his surprising admittance in June that the BoE could raise rates sooner than the markets expect.

Carney is now suggesting that there is no targeted time duration for a UK interest rates rise, instead a rate hike will be economically data-driven. The UK unemployment rate falling below 6%, alongside an advancement in UK wage growth would likely influence the decision.

Deputy BoE Governor, Sir John Cuncliffe maintained a similar tone when speaking to the BBC on July 3rd. However, Cuncliffe also indicated that a UK rate rise would also be dependent upon how much capacity there is for the UK economy to grow, before encountering inflation pressures.

Currently, UK inflation is at a five-year low (annualised 1.5%) and a considerable distance away from the BoE’s 2% threshold CPI target to begin considering a rate increase.

There is still some time before the BoE to turn hawkish and become one of the first major central banks to begin raising interest rates since the global financial crisis developed. This will likely prove pivotal towards the EURGBP’s resilience to extend to further multi-year lows.

In the meantime, the battle to extend below 0.7915 will remain in the immediate focus, while a collaboration of both disappointing Germany data and an impressive UK manufacturing performance would encourage further bearish pressure for the EURGBP, with a future battle to reach the August 2012 low, 0.7830 next on the horizon.

Technically speaking, the EURGBP continues to trade in a downward channel and with the current economic climate for these two economies remaining contradictory, there is minimal chance of this concluding anytime soon.

*Ahmad is chief market analyst at FXTM