The euro edged higher against sterling on Friday, lifting EUR\/GBP back towards 0.8500 after touching a 13-month low of 0.8455. Even so, the cross is still on course for a fourth straight weekly fall, down about 2.20% since mid-June. Support for the single currency has been linked to improved risk sentiment and expectations for tighter European Central Bank policy, after a Reuters poll showed 70% of respondents looking for a quarter-point rate rise in September following a pause in July.<\/p>\n\n
Attention later turns to June\u2019s final Eurozone Harmonised Index of Consumer Prices, which is expected to confirm inflation easing to 2.8% from 3.2% a month earlier, although the data precede the closure of the Strait of Hormuz and a subsequent rise in crude prices. Sterling has strengthened in recent weeks despite a UK political impasse, with markets focused on the prospect that the next cabinet will adhere to Chancellor Reeves\u2019 fiscal rules, while speculation that the Bank of England could raise interest rates before year-end has also supported the pound.<\/p>\n\n
We suggest derivative traders capitalize on the temporary rebound in EUR\/GBP toward 0.8500 by buying short-term call options. Since the pair has plummeted 2.20% since mid-June to hit 13-month lows, the current relief rally presents a prime window to capture upside volatility. Historically, when EUR\/GBP drops to these levels, short-term implied volatility tends to mean-revert from low levels of around 5.5% back toward its long-term average of 7%.<\/p>\n\n
With 70% of polled economists anticipating an ECB rate hike in September, pricing in this hawkish shift through interest rate swaps is highly recommended. The recent closure of the Strait of Hormuz has already pushed Brent crude prices up, which we expect will reverse the downward trend in Eurozone inflation from its current 2.8%. During previous energy shocks, like the one in 2022 when crude spiked, Eurozone import prices surged by over 20%, which could force the ECB to act aggressively.<\/p>\n\n
On the other side of the trade, we believe the Pound’s recent strength is overextended and ripe for hedging. While confidence in Chancellor Reeves’ fiscal rules has kept Sterling supported, BoE rate expectations are already heavily priced into the market. Traders should consider buying out-of-the-money GBP put options to protect against a sudden correction if UK economic data underperforms in the coming weeks.<\/p>\n\n\n\n