EUR\/GBP eased to around 0.8630 in Asian trading on Friday, giving back part of two days of advances after fresh releases from the UK and Germany. UK GDP fell 0.1% month on month in April after a 0.3% rise in March, matching expectations for a 0.1% decline. The Index of Services held at 0.8% on a three-month-on-three-month basis, while Industrial Production was flat at 0% month on month and Manufacturing Production rose 0.4% in April.<\/p>\n
In rates, money markets are pricing at least a 25-basis-point Bank of England move in September, with a strong chance of a second rise before year-end. In the euro area, Germany\u2019s revised Harmonised Index of Consumer Prices rose 2.7% year on year in May, while the monthly rate slipped 0.1%. The European Central Bank raised interest rates on Thursday for the first time in nearly three years and indicated restrictive policy is likely to remain in place through 2027.<\/p>\n
We are watching the clear conflict between a weakening UK economy and a hawkish Bank of England. The recent 0.1% monthly GDP contraction for April, a pattern of weakness we\u2019ve seen before in periods like mid-2023, makes the market’s pricing of a September rate hike questionable. This fundamental uncertainty is creating tension in the EUR\/GBP pair around the 0.8630 mark.<\/p>\n
The European Central Bank has given us a much more straightforward signal with its first rate hike in years and a promise to remain restrictive until 2027. This strong commitment provides a solid floor for the Euro, especially as German inflation remains well above target at 2.7%. This contrasts sharply with the UK, where the BoE is being forced to consider hikes while the economy is shrinking.<\/p>\n
Given this divergence, we anticipate an increase in volatility over the next few weeks. We are looking to purchase EUR\/GBP options strategies, such as straddles, to capitalize on a significant price move as markets digest this conflicting data. Implied volatility for the pair has already risen to 7.3% for one-month contracts, up from an average of 6.5% last quarter, which signals that a breakout may be coming.<\/p>\n
For those with a stronger directional view, we believe the ECB\u2019s clear policy path is more credible than the BoE’s difficult balancing act. We are therefore considering building modest long positions through EUR\/GBP call options with expirations in late July or August. This allows us to benefit if the Euro appreciates as investors start doubting the BoE’s resolve to hike rates into a downturn.<\/p>\n
Our immediate focus will be on the upcoming UK inflation and jobs data. The UK unemployment rate, which stood at 4.4% in the latest report, will be a critical indicator to watch. Any further increase in joblessness could force money markets to rapidly scale back their BoE rate hike expectations, likely pushing EUR\/GBP higher.<\/p>\n","protected":false},"excerpt":{"rendered":"
EUR\/GBP slips near 0.8630 as weak UK GDP contrasts with ECB hawkishness, boosting volatility expectations.<\/p>\n","protected":false},"author":87,"featured_media":47750,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[71],"tags":[],"class_list":["post-48806","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\n\t\t