EURO PRICES AT RISK OF STEEP FALLS

GDP growth in the US and the UK this year will likely be significantly higher than in the Eurozone and that does not yet seem to be priced in fully to the EUR/USD or EUR/GBP exchange rates, suggesting further weakness in both pairs. According to the International Monetary Fund, economic growth in both the US and the UK could reach 7% this year – the highest figure among the major advanced economies – compared with a relatively modest 4.6% in the Eurozone.

This is one of the reasons why both the US Federal Reserve and the Bank of England are expected to tighten monetary policy before the European Central Bank. Indeed, the Fed could outline its plans as soon as this year’s Economic Policy Symposium in Jackson Hole,Wyoming from August 26-28 while the ECB remains persistently dovish.

Is this in FX prices already? Some of it certainly is, but with the 10-year US Treasury note yielding a full 1.8 percentage points more than the 10-year German Bund – and with the gap likely to rise as Fed tightening draws nearer – it is hard to see anywhere for EUR/GBP and EUR/USD to go but down.