Euro wavers below 0.8590 against the British Pound, lacking clear bias

The Euro (EUR) remains flat against the British Pound (GBP) on Monday, with German Trade Balance data failing to provide any significant support. This leaves the EUR/GBP pair looking for direction within a tight range below 0.8590, after rejection above 0.8600 last week.

German Trade Balance data from July beat expectations earlier on Tuesday, as the surplus widened to EUR 21.3 billion, well above the EUR 16 billion expected and the EUR 15.4 billion seen in June. Looking at the details, however, data from the Federal Statistics Office of Germany revealed that the surplus was due to a 5.7% decline in imports, which offset a 0.8% decline in exports.

German data reflects frail economic growth

These figures add to evidence of a softening German economic growth, highlighted on Monday by the negative surprise in the German Industrial Production report. Factory output dropped 1.1% in July, against expectations of a 0.3% increase, weighed by a sharp decline in the country’s automotive sector.

German data offset optimism from positive Eurozone Gross Domestic Product (GDP) data, which was revised up to 0.6% growth in the second quarter, up from the previously estimated 0.4%. 

The pound, meanwhile, remains subdued as markets digest John Healey's first speech as UK Chancellor. Strategists at Brown Brothers Harriman note that Healey has pledged to build a solid fiscal “buffer against uncertainty” in the October 28 Budget. They argue this commitment “points to a mix of tax rises and spending cuts” as higher borrowing costs are estimated to have halved the government’s fiscal headroom to around “£12bn,” underscoring the scope for a tighter fiscal stance ahead.

Against this background, BBH assesses that “the UK’s negative output gap, a policy rate above the mid-point of the BoE’s 2% to 4% neutral range estimate and the prospect of tighter fiscal policy” are factors that “argue for a less aggressive hiking cycle,” leaving the Pound vulnerable to a dovish repricing if incoming data fail to justify the degree of tightening currently implied by rates markets.