EUR (1.091) ▲

• Initially pressured by uncertainty surrounding the French election and weakening below the 1.07/USD level, the EUR rebounded above the 1.09 mark despite the unexpected hung parliament outcome. The primary catalyst for this recovery was USD weakness, driven by cooler-than-anticipated US June CPI readings and Fed’s dovish commentary. Mixed EU economic data has pushed market expectations of the ECB's next rate cut decision to September, further supporting the euro.

• With the ECB not expected to cut rates this Thursday, especially in light of rising wage growth and persistent services inflation, the euro may stabilise around the 1.09/USD level. This is particularly likely given the ongoing downside risks for the USD. Continued signs of economic weakness in the US, which may bolster the case for a September rate cut by the Fed, could further support the euro. However, the ongoing political limbo in the eurozone may limit these gains.

GBP (1.298) ▲

• The pound traded weak within a narrow range of 1.265 to 1.270 in the last week of June, impacted by the spillover from EU political risk. However, the safe-haven demand for the USD was short-lived as soft US data dragged the USD index below the 105.0 level, enabling the sterling to strengthen close to the 1.300/USD threshold. The pound also found support from robust UK GDP reading for May and a hawkish narrative from the Bank of England, which highlighted upside risks in services inflation and cast doubt on an August rate cut.

• Despite expectations that UK inflation would trend lower than the BoE target at 1.9% YoY (May: 2.0%), uncertainty around wage growth, particularly regarding the minimum wage plan, may continue to exert upward pressure on prices. We believe that without a significantly lower inflation reading, the BoE may remain cautious and keep rates unchanged in August, which would support the pound above the 1.300 level. Combined with weaker US data, particularly on spending and inflation, this could bolster the case for a stronger GBP in the near term.

Source: Kenanga Research - 17 Jul 2024