Euro Gains and GBP Slips Amid Market Jitters.

• Euro Recovery Attempts: The euro tries to recover losses after stronger-than-expected German industrial growth, despite a shrinking trade surplus and declining exports.
• Yield Gap Dynamics: The euro reached its highest levels against the dollar this week as US economic concerns narrowed the yield gap between Treasuries and German bunds.
• German Industrial Boost: German industrial production grew by 1.4% in June, driven by a 7.5% rise in automotive production, while the trade surplus fell to its lowest since October.
• Pound Under Pressure: GBP/USD fell by over 0.4% due to risk-off sentiment, BoE uncertainties, and geopolitical tensions, despite positive construction PMI and retail data.
• US Dollar Firmness: The US Dollar strengthened amid recession fears, partially supported by positive ISM services PMI, but capped by disappointing trade balance data and nonfarm payrolls report.

EUR: The euro is attempting to recover from its losses after an unexpected acceleration in German industrial production growth, although the trade balance surplus shrank to its lowest point this year due to a decline in exports. This week, the euro reached its highest levels against the dollar since January, driven by growing concerns over the US economy which led to the yield gap between US Treasuries and German bunds narrowing to erase all of this year’s gains. Initially, the yield gap widened but later slightly contracted to 1.668% in favor of US Treasuries. Despite this, the eurozone economy remains shaky, evidenced by recent negative data. Positive economic indicators are crucial for the euro to regain its strength against the dollar and distance itself from parity. Encouragingly, German industrial production grew by 1.4% in June, reversing May’s contraction, largely due to a 7.5% rise in automotive production and a 1.4% increase in energy-intensive industries. However, Germany’s trade surplus fell to €20.4 billion in June, its lowest since October, with exports to the EU, eurozone, and the US declining by 3.4%, 3.2%, and 7.7% respectively, while overall imports grew. Weak demand from trading partners continues to weigh on the German economy.

GBP: At the time of writing, GBP/USD is trading at $1.2705, having fallen by more than 0.4% in the past 24 hours. The pound was under pressure due to a risk-off mood and uncertainties surrounding the Bank of England (BoE). Despite a better-than-expected construction PMI, Sterling sentiment remained subdued. Data from the British Retail Consortium (BRC) showed an increase in retail activity in July, yet this did not lift the pound. Markets were dominated by a bearish outlook due to escalating violence in the Middle East, with Iran pledging retaliation following Israel’s apparent assassination of Hamas chief Ismail Haniyeh. As more countries become involved in the Israel-Palestine conflict, the likelihood of a larger war grows. The absence of hawkish rhetoric from BoE officials further dampened GBP morale. The BoE cut interest rates by 25bps last week, and markets speculate that policymakers might loosen monetary policy twice more in 2024, portraying the BoE as dovish compared to central banks like the Reserve Bank of Australia (RBA). However, Governor Andrew Bailey struck an optimistic tone earlier in the week, confirming his commitment to his 8-year term with the BoE and expressing hope that inflation concerns will diminish as it has fallen significantly over the past 18 months.

USD: The US Dollar strengthened against the Pound on Tuesday but traded within a wide range against other currencies as recession fears lingered. Comments from Austan Goolsbee, President of the Federal Reserve Bank of Chicago, provided some reassurance but did not fully allay market concerns following last Friday’s dismal nonfarm payrolls report, which limited gains. Goolsbee cautioned against overreacting to one month’s data due to potential margins of error. Nonetheless, partial expectations of a 50bps interest rate cut from the Federal Reserve in September weighed on USD sentiment, and broader economic stability concerns fueled investor caution. A risk-off mood prevailed, supporting the US Dollar in various exchange rates and limiting losses. Monday’s ISM services PMI, which exceeded expectations at 51.8, also bolstered the currency. However, Tuesday’s trade balance report fell short of expectations, showing a US trade deficit of $-73.1bn instead of the forecasted $-72.5bn. While exports of US goods increased, service exports declined due to reduced travel demand.