Morning Brief – Race to the bottom

Charles Porter
Thu 24 Aug 2023

Race to the bottom

The lack of volatility within some key currency pairs was reaching concerning levels. The paralysis of pairs including GBPEUR meant that intraday volatility was almost negligible, with only minute and seemingly controlled fluctuations in the pair to observe. Despite that low volatility environment having set in for several months now, the race to the bottom in economic data may have finally pushed some volatility into the pair. 

It started off yesterday with data from France, Germany and the Euro area as a whole released early on in the European trading session. The services component in particular for each geography of PMI data that was released was recorded far below expectations. Like we have discussed recently with services inflation data, a similar degree of attention is paid to other services-orientated data in order to get an early read on the economic components most reactive to core inflation. A miss of expectations in each geography and a move into contractionary territory for Germany and the Euro area (sorry France but you were already in contractionary territory), was enough to push the Euro significantly lower. 

GBPEUR therefore sat for the early European trading session at an elevated level and at one of the highest rates we have seen for some time. However, very shortly after the Eurozone data, the UK’s own PMI readings were observed. This showed a similar fall into contractionary territory as we had seen for much of the Euro area only a short while earlier. Having exhibited higher volatility for some time now and with a stronger rate hiking cycle priced in, GBPEUR fell rapidly. From the technicals, GBPEUR has set up a bearish pattern with the ability to fall in the coming sessions whilst taking a breather amidst a data-light finish to the week for the pair. 

Discussion and Analysis by Charles Porter

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