Insights 
VT 
The Euro has fallen below 0.8700 against the British Pound, influenced by concerns over France’s new cabinet. Market caution prevails, with the currency briefly retreating to 0.8685 as fears of a US-China trade war also affect risk appetite.
In France, the cabinet faces doubts about passing a budget due to a split parliament. Simultaneously, US-China tensions arise over trade restrictions, with potential 100% tariffs looming, despite efforts to reduce hostilities.
Insights from the BoE
In the UK, discussions from Catherine Mann of the BoE may offer insight into monetary policy, with focus on upcoming employment data. This could shape BoE Governor Bailey’s speech scheduled for Tuesday.
The Pound Sterling, used in the UK, is the world’s oldest currency and the fourth most traded, accounting for $630 billion daily. Its value is largely influenced by the Bank of England’s monetary policies, which aim for a steady inflation rate of 2%. UK economic health impacts its value; positive data often strengthens it. Conversely, a negative trade balance can weaken the currency’s standing.
Significant data releases like GDP and trade balance are indicators of the economy’s health, which in turn affect the Pound Sterling’s value.
The EUR/GBP has broken below the key 0.8700 level, and we see this weakness stemming from Paris. Investor skepticism about the new French cabinet’s ability to pass a budget is weighing heavily on the Euro. We’ve seen the spread between French and German 10-year government bonds widen by 15 basis points last week to 65 basis points, a high not seen since the political uncertainty of early 2024.
Impending UK Data and Eurozone Uncertainties
On the Sterling side, all eyes are on tomorrow’s UK employment data and Governor Bailey’s subsequent speech. We recall that last month’s report for August showed UK wage growth remaining stubbornly high at 5.8%, even as the unemployment rate ticked up to 4.4%. This conflicting data creates significant event risk for the Pound, as a hawkish Bailey could easily reverse the pair’s current direction.
Given the political uncertainty in the Eurozone and the major UK data event ahead, we expect volatility in EUR/GBP to rise sharply in the coming weeks. This suggests that buying straddles or strangles could be a viable strategy to profit from a large price swing in either direction, without betting on the outcome of Bailey’s speech. Looking at implied volatility, the one-month contract has already jumped to 8.2%, up from 6.5% just two weeks ago.
For those with a directional view, the break of the 0.8700 level, which acted as strong support throughout 2024, is significant. We believe put options on the EUR/GBP offer a risk-defined way to position for further downside towards the 0.8600 support zone. However, any surprisingly weak UK jobs numbers tomorrow could trigger a sharp squeeze back above 0.8700.
