Is $1.20 on the cards for GBP, and will Germany tank the EUR?

It’s turning into quite the August for financial markets. There have been some major moves in FX, commodities and in stock markets and we’re not even half way through the month. This can be a particularly volatile time for financial markets as liquidity can be thinner than normal at this time of year. As we start a new trading week, we take a look at three markets that we believe could be big movers in the week ahead.  

Sterling gets a lesson in fundamentals 

The first market that we are looking at is sterling. It fell sharply last week and suffered a further broad-based decline after the GDP report for Q2 showed that the UK economy had contracted by 0.2% between April and June. GBP/USD tumbled to its lowest level of the year so far and fell to a low of $1.2025. At the start of the new trading week, sterling continues to look weak, as we wait for some key economic data including Tuesday’s labour market data, Wednesday’s inflation data and Thursday’s retail sales. GBP/USD is currently trading a mere ten pips away from last week’s low at approx. $1.2035. 

When will the buyers step in? 

At the very start of this trading week, the Asian market appears reluctant to buy in to a recovery rally for sterling. Since the path of least resistance for this pair is lower, and the technical signals suggest that this pair remains a sell, then we may need to wait until Europe settles into the new trading week to see whether the market will try to push GBP/USD below $1.20. The fundamental data that is mentioned above is critical. The pound tanked on the back of “old” GDP data at the end of last week, this week’s data is fresh and tells us about the trajectory for Q3. Thus, the market reaction could be even larger if we get any surprise readings from the labour market, inflation or retail sales data in the coming days. While we expect the labour market data to remain fairly stable (it tends to be a lagging economic indicator), the market is expecting core inflation data for July to have fallen back to 1.7% from 1.8%. if headline inflation is weaker than the 2% expected, then this could be the trigger the market needs to send GBP/USD back to multi year lows, as, in theory, it should make it easier for the BOE to cut interest rates. The retail sales data is also worth watching. The market is expecting a weak reading of -0.2% for retail sales ex-fuel last month, if the actual figure is weaker than expected, this may also add impetus to a sterling sell off.

Although momentum appears to be on the side of a weaker pound, we would caveat that by saying that the last time GBP/USD fell below $1.20, the market swooped in to buy the pound “on the cheap”. The lowest ever level for GBP/USD was $1.1866, reached in 2016, which is not that far away. This is a major support level, if it doesn’t hold then the future does not look good for pound bulls. The other point to note, is that sterling has experienced its worst week since 1985, thus, could the selling pressure have reached a crescendo and back down from here? Those who have consistently sold the pound over recent weeks will have made a tidy profit, thus, there is a chance that the selling pressure could ease in the coming days as traders square their positions as we approach these important levels. Of course, it goes without saying that the pound remains sensitive to Brexit talk. If tensions heighten further between the UK government and the EU then we would expect the pound to take a hit, although we would urge caution the closer GBP/USD gets to $1.1866. 

Will Germany flatten the euro? 

The second major event to watch this week is the German GDP report. The German economy could be even weaker than the UK’s, as its large manufacturing sector suffers from the fallout of the US/China trade war. The Q2 data spans the period when the trade war notched up a gear, thus this data, released on Wednesday, will give us a good steer on German economic strength – is the economy resilient enough to withstand a global trade war, or will it wither alongside US/ China relations? The market is expecting a decline of 0.1% for the quarter, a weaker than expected figure could see the euro struggle, and EUR/GBP may also take a tumble, especially if the UK data this week surprises on the upside. 

EUR: the technical picture 

EUR/USD managed to rise last week and jumped back above the $1.12 level. While $1.1250 remains stiff resistance, the technical indicators are looking perkier for EUR/USD, thus it may take a shock decline in the German economy to push EUR/USD back to the $1.11 lows from last week. EUR/GBP looks unstoppable since it has broken above the key 0.90 level, and it has regained 0.93 after an early dip to 0.9250 earlier. We continue to think that this pair could reach parity, however, maybe not in a straight line, especially if the German economy underperforms in Q2. We believe that 0.90 remains a secure support for this pair, and unless the UK looks like it can secure a deal to leave the European Union before October 31st, then 0.95 and parity could be on the cards in the coming months. However, if Brexit talk remains muted this week, and German data is weak, then we could see the euro wobble, as it would make it more likely that the ECB will re-start its bond buying programme next month. Thus, there is a chance that the euro could be at risk from a sell off this week, although any decline, especially in EUR/GBP, could be used as a buying opportunity. 

China and oil also in focus 

Also worth watching this week is the Chinese renminbi, if USD/CNY continues to trade above 7.00 then we could see the US/China trade war rhetoric pick up, which may weigh on stocks. The oil price is also sensitive to slowing global growth. An escalation in the trade war, combined with weak global economic data could see Brent crude dip towards $55 per barrel, after it fell below $60 per barrel last week. The decline in the oil price was not halted by Saudi officials reminding the market that they could cut production to artificially prop up prices; this suggests that global economic forces remain a bigger driver of the oil price than the actions of Opec.