EUR & GBP: What They Have in Common at This Crucial Moment?

EUR: Eyes on the minutes

According to its most recent consumer expectations report, the findings suggest a slight increase in inflation expectations for August. The report reveals a modest rise in forecasts for both the next 12 months (from 3.4% to 3.5%) and the following three years (increasing from 2.4% to 2.5%).

Although these adjustments may seem small, the significant aspect is that inflation expectations persistently rise despite the European Central Bank's recent interest rate hikes, strengthening the argument for a more cautious approach. However, the current state of the financial markets implies a minimal probability of another rate hike in the eurozone. This is due in part to the cautious stance taken by ECB speakers, which reinforces a more accommodating viewpoint.

Furthermore, the ECB is set to release the minutes from the September meeting. This event is likely to introduce some idiosyncratic factors affecting the EUR, as the currency pair EUR/USD has largely been driven by developments in the US dollar throughout the week. Expectations suggest that we will witness further indications of a divided governing council, with numerous members leaning towards keeping interest rates unchanged in December. While there are downside risks for the euro, they are not particularly significant, given that the markets have already discounted expectations of any imminent tightening measures.

GBP: GDP in line with expectations

In August, the UK's Gross Domestic Product (GDP) experienced a 0.2% month-on-month increase, aligning with market expectations. However, it's worth noting that the preceding figure was modestly revised downward. Meanwhile, industrial production showed a year-on-year growth of 1.3%, falling short of the consensus estimate of 1.7%. Following these releases, the British pound remained stable without significant movement.

The Bank of England's primary focus remains cantered on inflation and upcoming job figures, which are slated for release in the coming week. Market sentiment regarding the possibility of another interest rate hike this year (with two meetings remaining) is currently below the 50% mark. This sentiment is influenced in part by the broader narrative from the United States, where the idea of “higher rates equate to no further hikes” has gained traction.

Nevertheless, the euro remains comparatively less appealing when contrasted with the higher-yielding British pound, and the downward trend in the EUR/GBP currency pair may have room for further decline from its present levels. A move below the 0.8600 threshold in the short term is conceivable.