Sterling Slips to 20-Month Low Against the Euro

The pound has fallen to its lowest level against the euro since November 2023, following another round of underwhelming UK data releases, particularly in flash PMIs and retail sales. The GBP/EUR pair had already broken out of its long-term upward trend earlier this year and retested the trendline near €1.20 in May before reversing sharply. This shift signals that momentum remains tilted towards the downside.

The European Union’s recent trade agreement with the United States may also support the euro in the longer term by keeping EUR/USD elevated, which in turn places further downward pressure on GBP/EUR. That said, markets may be overstating domestic risks in the UK. Beneath the headlines, the economic backdrop remains relatively sound, with underlying activity and inflation trends offering a level of resilience that is not yet fully priced into the pound.

With a 25 basis point cut from the Bank of England almost fully priced in, the Monetary Policy Committee appears likely to maintain its gradual quarterly pace of easing at the upcoming 7 August meeting. Meanwhile, speculative positions against the pound remain heavily stretched, leaving room for a potential recovery in GBP/EUR to levels more aligned with interest rate differentials and implied volatility. Still, August is historically volatile, which could see the euro remain favoured in the near term.

Turning to GBP/USD, the pair failed to hold above its 21-day moving average, indicating that last week’s modest rebound may prove short-lived. The pair continues to trade closely in line with broader US dollar sentiment. Strong US economic data could pull the pair lower in the near term. A fall towards $1.33 is our tactical target over the next one to two weeks unless GBP/USD manages to close this week above $1.35. Any perception that recent US trade deals may weigh more heavily on the American economy than on its trading partners could offer some upside risk for the pound.

 

Markets Turn the Page as Tariff Uncertainty Fades

July ends on a high note. A wave of central bank decisions, employment data, and developments in global trade tensions has been absorbed with minimal disruption, helping to sustain positive momentum across financial markets. As concerns around a prolonged tariff conflict continue to ease, investors are increasingly moving beyond the trade narrative.

Following recent agreements with the United Kingdom, China, Vietnam, Indonesia, the Philippines, and Japan, the United States reached a new deal yesterday with the European Union. Four of America’s largest trading partners now enjoy greater policy clarity. Ongoing discussions with Canada, Mexico, and South Korea remain. While progress with South Korea may be announced this week, expectations for breakthroughs with Canada and Mexico are more restrained. A formal renegotiation of the USMCA (also known as CUSMA) appears unlikely for now, although existing treaty provisions offer some protection for Canada and Mexico against the proposed tariff increases of 35 to 30 percent.

Despite broader progress, isolated concerns remain. Further communications may be sent to certain countries, though a major escalation is not anticipated. Sector-specific measures are still under review within the US administration, with potential implications for industries such as timber, pharmaceuticals, semiconductors, critical minerals, aviation, drones, and polysilicon. Domestically, legal debates around tariff implementation continue. Notably, a 50 percent tariff on copper is set to take effect on Friday, contributing to a 3.5 percent depreciation in the Chilean peso against the US dollar over the course of July.

Implementation timelines for these new trade arrangements remain unclear. Japan’s chief negotiator, Mr Akazawa, noted there had yet to be any discussion of a legally binding framework or how it might be enforced. Nonetheless, after a turbulent start to the year, this sequence of non-retaliatory deals ahead of the 1 August deadline provides enough reassurance for markets to shift their focus away from trade-related risks.

 

Euro at a Crossroads as US Data Looms Large

On Sunday, the European Union and the United States reached a long-anticipated trade agreement just days before the 1 August deadline, which would have triggered a 30 percent tariff. Instead, the agreement introduces a 15 percent tariff on most European exports to the United States, with notable exemptions for steel, aluminium, and pharmaceuticals. Beyond the tariff terms, the deal also includes substantial investment pledges: the EU will purchase 750 billion US dollars in American energy and commit a further 600 billion to additional investments. While complete details are still emerging, both President Trump and European Commission President Ursula von der Leyen have praised the agreement.

The implications for the euro remain uncertain. Avoiding a trade war helps shield the eurozone from the prospect of deeper ECB rate cuts and slower growth, suggesting potential support for the single currency. On the other hand, the US dollar may also benefit from the return of policy clarity, which had been lacking earlier in the year and contributed to its weakness.

Last week, EUR/USD failed to retest the early July highs near 1.18, despite lingering concerns over the dollar and a more hawkish tone from the ECB. This suggests that the forces that had previously driven the pair higher — namely US political noise and dovish Federal Reserve guidance — may be starting to lose influence. On the political front, sentiment towards the dollar has improved slightly due to trade progress and reduced friction between President Trump and Federal Reserve Chair Jerome Powell. Meanwhile, the Fed has clearly shifted to a more hawkish stance since early July, eroding one of the key supports that had buoyed the euro earlier in the summer.

The pair ended last week trading within a narrow range of 1.1700 to 1.1780 but remains technically supported. On the daily chart, EUR/USD continues to trade above its 21-, 50-, and 200-day moving averages, keeping the first-half rally intact for now.

With the Federal Reserve expected to maintain its cautious, data-dependent approach, this week’s wave of US economic data becomes the main catalyst for EUR/USD. Strong figures could trigger a break below 1.17, with the next key support level around 1.16 where the pair may start testing the 50-day moving average more decisively. While talk of a full reversal is premature, risks are starting to build.

Within the eurozone, this week’s economic data releases — particularly on unemployment, GDP, and inflation — will also be closely watched. However, with expectations already tempered, it would take a significant downside surprise to shift ECB policy meaningfully. As a result, the US macro picture is likely to remain the dominant influence on EUR/USD direction for the days ahead.