EUR/GBP at risk as manufacturing slowdown highlights eurozone underperformance​​​​​​​​​​​​​

[MongiIG]

EUR/GBP looks at risk of further downside, with improving UK GDP coming in stark contrast to a eurozone at risk of a manufacturing-led slowdown.

Source: Bloomberg

 Joshua Mahony | Senior Market Analyst, London | Publication date: Wednesday 13 October 2021 

UK growth improves in August

This morning has seen a raft of data points released in the UK, with the economy largely pointing in the right direction. The GDP figure was always likely to gain particular attention, with the August figure of 0.4% bringing an improved view after a 0.1% contraction in July. As seen below, this brings the UK economy back towards the pre-pandemic levels.

Source: Office for National Statistics

 

It is perhaps unsurprising to see much of that recovery driven by the services sector, with the lockdowns bringing particular difficulties for the UK economy.

However, that does provide the potential for a stronger outlook given difficulties evident throughout the manufacturing sector of late.

Source: Office for National Statistics

 

While issues remain for the UK economy, the lessened reliance upon the manufacturing sector does mean the recent logistical and input pricing difficulties will hit other nations more so than the UK.

Hiring does remain a key problem for many companies as we head towards the crucial festive period. However, energy and material intensive industries will be at risk given the recent troubles evident throughout China.

With that in mind, it makes sense to expect outperformance for UK growth compared with much of the eurozone. As a result, we have a notable difference between the outlook of the European Central Bank (ECB) and that of the Bank of England (BoE).

While the BoE is expected to raise rates in the second quarter (Q2) 2022, we have looked all the way to the fourth quarter (Q4) 2023 for the first hike from the ECB.

That could obviously change, yet near-term economic struggles could ensure greater hesitancy despite rising prices in the eurozone. The ING rate forecasts below highlight that disparity between ECB thinking and that of the Fed/BoE.

Source: ING central bank

 

With the UK economy expected to outperform and the ECB rates potentially remaining unchanged for another two years, it makes sense to look for EUR/GBP weakness from here on.

The daily chart highlights how price has been consolidating above the key April support level of 0.8472. A break below that point would point towards 0.8450 as the next hurdle to overcome for bears.

However, such a move looks likely, bringing the potential for another period of weakness for the pair.

Source: ProRealTime

 

The four-hour chart highlights how price remains above key support for now, with today bringing yet another touch of 0.8472. That respect does highlight the potential for a rebound following recent losses.

A push up through 0.8518 would bring greater confidence of that short-term move higher. However, further losses do seem likely before long, with a break below 0.8472 bringing about a new sell signal for this pair.

Source: ProRealTime