Fiona Cincotta | Source | Financial Market Analyst at Self-Employed

EUR/GBP Corrects Lower After Hitting 10 year High

EUR/GBP is moving lower after striking a decade high overnight.

The euro is under pressure on Monday as Italian politics and concerns over the health of the German economy take centre stage.

Italian politics are back under the spotlight as Deputy Prime Minister Matteo Salvini called for a snap general election citing differences between the coalition partners as irreparable. Right wing Mr Salvini is ahead in the polls largely thanks to his anti-immigration and “man of people position”, pushing for tax cuts despite Italy’s mounting tax pile. Whilst Salvini’s pledge for tax cuts is making him popular with the Italian electorate, the same cannot be said among euro traders. Any sign that Italy is willing to let its debt pile grow further out of control could be bad news for the euro.

Gloomy data last week from Germany, fuelled concerns that eurozone’s largest economy is heading for a recession. Industrial production dropped by a more than expected -1.5% month on month in June. Annually, industrial production declined at the fastest pace in almost a decade. Meanwhile German exports slumped 8% yoy in June. The dismal data underscores the struggles that the German manufacturing sector is facing as global trade tensions escalate. Attention will turn squarely to German Q2 GDP data on Wednesday, which is expected to show a contraction.

Signs of a slowing German economy could increase investor expectations for the ECB to adopt a more dovish monetary policy in a bid to tackle the slowdown.
Moves higher in the pound could be short lived
The pound is having a rare up day at the start of the week after dipping to 10-year lows versus the euro overnight. No deal Brexiit fears combined with the UK unexpectedly slipping into contraction in the second quarter. Ongoing Brexit uncertainty and a slowing global economy are clearly taking their toll on the UK economy dragging the pound lower. However, the pound was finding some relief from Brexit news flow on Monday. MP’s may well be on summer recess but that is not preventing them for exploring ways to prevent a no deal Brexit. A vote of no confidence by the opposition party or Parliament forcing an extension to Article 50 are two potential options for avoiding a no deal Brexit. However, the bottom line is that pro-Remainers are running short of options. Therefore, any move higher in the pound could be short lived.

EUR/GBP levels to watch:

EUR/GBP moves lower after surpassing 0.9300 overnight, the pound at its lowest level in 10 years. The pair is down over 0.5% on the day. Immediate support can be seen at 0.9250. A break through here could open the doors to 0.9089 prior to 0.9050. On the upside resistance can be seen at 0.9324 before the pair targets 0.94.

Investor gloom

London shares opened down, taking their cue from the investor gloom affecting the US markets, with the Nasdaq falling back -1.00% from its high last week and the S&P500 down -066%. A Goldman Sachs report said the uncertainty caused by the US-China trade war may be having a greater effect on the US economy than expected, saying the trade war is causing businesses to delay investing. Holding out little hope for a trade deal being concluded before the 2020 presidential elections, Goldman lowered its fourth-quarter US growth forecast by 20 basis points to 1.8%.
European trading was down across the board over concerns about a possible return to political instability affecting the economy, after Italy’s deputy prime minister Matteo Salvini called for a general election. Italy’s main index, the FTSE MIB, was particularly affected (-2.48%), with the FTSE relatively insulated (-0.44%), on poor trade data but helped by a weakened sterling. The UK’s second quarter contraction is not expected to herald a recession, being blamed on Brexit stockpiling, with a bounce back in data more likely for the third quarter. However, Brexit fears continue to affect the economy, with the biggest fall in July high street spending since 2012.

Russian cheer

Top of the FTSE benchmark is Roman Abramovich’s steel company Evraz, with its shares up 2.06%, after announcing solid interim results to end-June supported by positive trends in their key product markets, including a recovery of construction activity in Russia, which boosted consumption of most of their products. Antofagasta continues to feature at the top of the benchmark, opening on 1.71%, after a strong quarter featuring a jump in copper production and falling costs. Sitting at the bottom of the benchmark is Rolls Royce, down -2.51%, due to significantly high cash outflow, as it continues to throw money at fixing the problems with its new Trent engine. Fresnillo shares remained depressed, falling -1.89%, after announcing production cuts last week.
Asian shares opened the week on a positive note after a difficult week, led by the Shanghai Composite on 0.99%, the Sensex on 0.68% and the Nikkei 225 on 0.44%.

FTSE Flat; Pound Drops As Recession Fears Increase

The FTSE spent much of Friday’s session in the red, only clawing higher towards the flatline towards the end of the day. Lingering US – Sino trade / currency war concerns and further depressing data from Germany kept the global mood sour. However, the FTSE fared better than its European counterparts thanks to the tanking pound.

The pound was under pressure as fears grow that the UK economy could be heading for the first recession in a decade. UK GDP made for grim reading as official figures showed that the UK economy contracted in Q2. A toxic combination of Brexit uncertainty, the running down of Brexit inventories built up prior to previous Brexit deadlines and the closing of car plants, resulted in the UK economy contracting 0.2% in the second quarter. Growth of just 1.2% is expected across the year, down from 1.8% and short of expectations.

Given that the next Brexit deadline is 2 ½ months away, there is still time for looming Brexit jitters to inflict more damage on the UK economy. This means a second consecutive quarter of contraction and therefore a technical recession is now a very real possibility. Adding to the pound’s woes, industrial production and manufacturing figures also missed expectations by large margins.
The outlook for the pound remains extremely fragile as the prospect of a no deal Brexit increases. With the blame game between the EU and the UK in full swing, the chances of the two sides renegotiating the Irish backstop appears slim; instead preparations for a worse case scenario, no deal Brexit are being prioritised. With a general election being touted for 1st November, the day after Brexit, the options to prevent a no deal Brexit are starting to run thin. Add into the mix decidedly gloomy UK fundamentals, with little prospect for improvement in the near term and its easy to see why the bears are controlling the pound.