Yesterday’s adjustment lower in EUR/USD is in line with the general dollar strength in G10. We’ll be interested to see whether the other European pro-cyclical outperformer, GBP, follows suit with some softening – perhaps with markets taking the chances of an August Bank of England rate cut back to 50%+ after a BoC cut today. EUR/GBP looks rather cheap at 0.84 and GBP/USD rather expensive at 1.29 compared to their rate differentials.
In the eurozone and the UK, the PMIs will set the market mood today. Consensus is looking for an unchanged composite PMI at 50.9 in the eurozone and a slight improvement in the UK figures. The generally stable sentiment after the French election scare can favour a bit more optimism in the region, although structural challenges persist and business mood may struggle to improve much from here. EUR/USD can probably continue to trade in tight ranges into the next big market event – the FOMC meeting next week.
Elsewhere, we are keeping a very close eye on NOK and SEK, which have been the worst G10 performers since the assassination attempt on Trump. These are the two least liquid currencies in G10, and we suspect markets are particularly punishing this aspect and rebuilding those shorts that had been trimmed throughout May/June. Both currencies are close to key levels versus the euro.
EUR/SEK is testing the 11.70 resistance, which is where the Riksbank cut rates in May. Should it break higher, SEK may get some support from markets pricing out some Riksbank easing as they deem it inconsistent with such a weak currency. EUR/NOK is near the 12.00 mark, which was the 2023 peak. If we see a move to new post-pandemic highs, then we see Norges Bank stepping in with some sort of verbal support.
Both currencies are in very fragile positions, but we think it is more likely we have seen the peak in both EUR/SEK and EUR/NOK as opposed to a break above those key levels. After all, both currencies are already sharply undervalued, and in particular NOK can also count on an attractive yield.
Francesco Pesole
