EUR/GBP stayed on the defensive on Thursday, extending its decline to a fifth session after failing near the 0.8600 psychological level last week. The cross was trading around 0.8537, its weakest since mid-August. Sterling gained after UK second-quarter GDP was revised to 0.5% QoQ from 0.4%, while annual growth was lifted to 1.4% from 1.2%, reinforcing the macro backdrop watched by the Bank of England as markets assess the outlook for the bank rate.
The euro remained under pressure as political and fiscal concerns in France, alongside higher government borrowing costs and uncertainty over the budget outlook, fed debt-sustainability worries. Separately, the European Central Bank has raised rates twice this year, though expectations point to a more cautious path given energy-price risks to Eurozone growth. Manufacturing surveys offered some near-term support: the Eurozone HCOB Manufacturing PMI edged up to 52.9 in September from 52.7, whereas the UK S&P Global Manufacturing PMI slipped to 51.9 from 52.0. Attention turns to the Eurozone’s preliminary September inflation report due on Friday.
Sterling Strength and Strategy Implications
We see the EUR/GBP cross trading near its lowest levels since mid-August, currently sitting around 0.8537 after failing to break the 0.8600 level. Because of the British Pound’s recent strength, we suggest derivative traders lean toward short-term selling strategies on temporary price bounces. Historical price action shows that when this currency pair breaks below the 0.8550 support level, it often goes on to test deeper demand zones near 0.8480.
The upward revision of the UK’s second-quarter GDP to 0.5% shows a resilient economy that gives the Bank of England more room to tighten policy. Hawkish comments from policymakers suggest that interest rates may need to rise further to combat persistent inflation pressures. We believe traders should closely watch the yield spread between UK 10-year gilts and German bunds, as a widening spread typically supports further sterling strength.
Euro Weakness and Volatility Risks
On the other side of the trade, the Euro faces heavy pressure from political and fiscal instability in France, which recently pushed the French-German 10-year yield spread above 75 basis points. This fiscal uncertainty makes it difficult for the Euro to mount a sustained rally, even when local manufacturing data beats expectations. Therefore, we recommend using options to hedge long Euro exposure or focusing on breakout strategies if support levels fail.
While the Eurozone manufacturing PMI improved slightly to 52.9, the European Central Bank is expected to remain cautious due to broader growth concerns. We are closely monitoring the upcoming Eurozone preliminary inflation report, as any cooler-than-expected inflation data will likely encourage a more dovish stance from policy makers. Derivative traders should prepare for high volatility around this release by adjusting leverage and widening stop-loss orders to avoid sudden market swings.
