Analysts at MUFG Bank, see a trade idea in shorting the EUR/GBP cross with a target at 0.8350 and a stop-loss at 0.8670. They point out the positive evolution of COVID-19 cases reinforces the bullish outlook for the pound. 

Key Quotes:

“We have been encouraged by recent positive COVID data from the UK suggesting that the risk of further pandemic related disruption to the UK economic recovery has diminished. The vaccine roll out and number of people who have already caught COVID should help dampen the severity of the current and any future COVID waves allowing the government to refrain from re-imposing significant restrictions. A strengthening economic recovery and building upside risks to their inflation target should keep pressure on the BoE to tighten exceptionally loose policy.”

“The policy divergence between the BoE and ECB should continue to widen as the ECB has signalled strongly it does not plan to raise rates even as the euro-zone economy is recovering more strongly and inflation is set to rise above target.”

“We expect GBP gains to accelerate against the EUR once the year to date low at 0.8472 is taken out.”

“The main risks to the trade idea include: i) a more intensified period of risk off trading hitting the GBP, ii) BoE provides dovish policy surprise, and iii) UK COVID cases pick up sharply again in response to recent re-opening measures. If the BoE sets a much lower threshold for starting quantitative tightening would dampen future rate hikes expectations.”

  • Dollar gains momentum late on Friday and trims weekly losses.
  • Cable heads for biggest weekly gain since May.
  • Next week’s key events: NFP and Bank of England meeting.

The GBP/USD failed to hold to gains on Friday and tumbled to 1.3890, reaching the lowest levels since Wednesday. Despite the decline, cable is about to post the biggest weekly gain since early May, boosted by a weaker US dollar across the board.

The greenback gained momentum late on Friday, into the London fix and trimmed weekly losses. The dollar rose even as US yields dropped. Economic data from the US did not surprise market participants. The relevant report was the PCE Core index that rose 0.4% in June, below the 0.6% of market consensus.

GBP/USD is hovering around 1.3900/10, at the same level of the 20-week simple moving average. The failure to break above and hold could show signs of some exhaustion on the upside, favoring a correction. The 1.3730 area emerges again as a relevant support. A firm break above 1.4000 next week, should clear the way to more gains.

From the Fed to BoE and NFP

The US dollar did not benefit from FOMC events. From Wednesday until late on Friday, it fell across the board. Next week, the key report will be the Nonfarm Payroll report. “Payrolls probably surged again in July, with the pace up a bit from the +850k in June. Some acceleration in the private sector is suggested by the Homebase data, while government payrolls probably benefited from favorable seasonal adjustments. We forecast another 0.3% m/m rise in average hourly earnings. The 12-month change is likely to rise again to 3.8% from 3.6% in June”, wrote analysts at TD Securities.

In the UK, attention continues to be on COVID-19 developments. If cases accelerate, it could hurt market optimism on the economic recovery. Next week, the Bank of England will meet. No change in monetary policy is expected.  “We have become more confident in our bullish GBP outlook. While there is a risk that the BoE could disappoint hawkish expectations next week, any GBP weakness should be temporary”, mentioned MUFG Bank analysts.

Technical levels


The real gross domestic product (GDP) in the United States is expected to grow by 6.1% in the third quarter of 2021, the Federal Reserve Bank of Atlanta’s latest GDPNow report showed on Friday.

“The initial estimate of second-quarter real GDP growth released by the US Bureau of Economic Analysis on July 29 was 6.5%, 0.1 percentage point above the final GDPNow model nowcast released on July 28,” Atlanta Fed noted in its publication.

Market reaction

Market participants showed no reaction to this report and the US Dollar Index was last seen gaining 0.25% on the day at 92.10.

The US economy is expected to grow by 4.2% in the third quarter of 2021, the Federal Reserve Bank of New York’s latest Nowcasting Report showed on Friday.

“News from this week’s data releases increased the nowcast for 2021:Q3 by 0.1 percentage point,” the NY Fed noted in its publication. “Positive surprises from merchant wholesale inventory data drove the increase.”

Market reaction

This report was largely ignored by market participants and the US Dollar Index was last seen rising 0.27% on a daily basis at 92.12.

Recent data showed the Eurozone economy performed above expectations during the second quarter. Analysts at Wells Fargo explained data the latest report showed the positive momentum continued at the beginning of the third quarter. Still, they expect the European Central Bank (ECB) to maintain its accommodative monetary policy and, indeed, ease policy further in December by announcing a further increase in its bond purchase program.

Key Quotes: 

“Eurozone Q2 GDP grew a stronger-than-expected 2.0% quarter-over-quarter, with particularly strong gains reported for Italy and Spain. July inflation remained contained overall, as the headline CPI quickened only slightly to 2.2% year-over-year.”

“The ECB will certainly welcome the improvement in growth, while the moderate inflation trends means there is no need for the central bank to move to less accommodative monetary policy any time soon. That is reinforced by recent changes by the ECB to its policy strategy that included a shift to a symmetric 2% inflation target, and the dovish policy guidance from the ECB following its July monetary policy meeting. Indeed, given the latest COVID developments have added some element of near-term uncertainty, we now expect the ECB to refrain from tapering its bond purchases in September, and instead signal that Q4 buying for the Pandemic Emergency Purchase Program (PEPP) will continue to be conducted at a significantly higher pace than during the early months of this year.”

“If recent COVID developments do eventually have some influence on confidence and activity, and more importantly should underlying inflation trends fail to move meaningfully higher, we expect the ECB to announce a further increase in bond purchases. Our base case for the European Central Bank’s December monetary policy announcement is for the central bank to announce a further €500 billion increase in PEPP purchases, taking the size of that program to €2.350 trillion, with purchases under the PEPP program to continue until at least September 2022.”

Data released on Friday showed the Canadian economy contracted further in May. Analysts at CIBC point out containment measures necessary to curb the third wave of COVID-19 took a further toll on the economy in May, but the relaxation of those restrictions saw activity rebound sharply in June.

Key Quotes: 

“With virus cases generally low across the country, the economy has some open road to recover even more ground this summer. However, the Bank of Canada won’t be in any rush to pull forward the expected timing of rate hikes with challenges remaining, most notably in the form of variants of the virus which are already slowing the healing process in other developed economies.”

“The Canadian economy already began that process with a comeback in June coinciding with falling new Covid cases and the relaxation of restrictions. The flash estimate, which pointed to 0.7% growth, was roughly in line with what we had penciled in and puts the quarterly growth rate bang on our forecast of 2.5% annualized, a touch hotter than the Bank of Canada’s 2.0% forecast.”

“A solid handoff to the third quarter from the strong rebound in June leaves the economy in a position to post a lofty growth rate during the period, so long as momentum doesn’t tail off too much in the coming months. While we do see growth slowing later in the year, the rest of the summer should see the economy make solid progress, given the low numbers of new infections and the ongoing reduction of public health measures.”

  • US dollar rises across the board into the London fix.
  • Greenback trims weekly losses late on Friday.
  • AUD/USD back to negative for the week, drops toward 0.7350.

The AUD/USD broke under 0.7365 during the American session and fell to 0.7343, reaching a fresh two-day low. The key driver has been a strong US dollar across the board. The greenback gained momentum into the London fix.

The DXY eared losses and is up by 0.30% at 92.15, even as US yields move further to the downside. The 10-year yield stands at 1.22%, about to test the weekly low. The key economic report of the US was the core PCE deflator, considered a critical inflation number for the Federal Reserve. It rose 0.4% in June, against expectations of a 0.6% increase.

From the Fed to the RBA

After the Fed, now the focus turns to the Reserve Bank of Australia (RBA) that next week will have its monetary policy meeting. “We think policymakers in Sydney (a city that is about to spend the whole month of August in lockdown) will not make any amendment to the current policy stance after the adjustments announced in early July. The jump in inflation to 3.8% in 2Q should be dismissed as transitory, and the Bank will likely wait for more indications from the labour market before reacting on the policy side”, wrote analysts at ING. They add that the recent spread of the Delta Variant is likely another reason “why the RBA should revert from sounding more hawkish or upbeat on the recovery at this meeting.”

The Aussie is about to end the week as the worst performer across the G10 space, hit by monetary policy divergence. AUD/USD failed to hold to gains and on Friday to remain above 0.7400; it is on its way to the fifth consecutive negative weekly result. AUD/NZD heads for the lowest weekly close since November of last year.

Technical levels


The personal income and spending report showed a larger than expected number, while the inflation indicator came in below market consensus. Analysts at Wells Fargo see a transition to discretionary spending clearly underway. They point out the days of stimulus checks and buying stuff are gone.

Key Quotes: 

“Personal income increased 0.1% in June and spending increased 1.0%; both numbers exceeded consensus expectations. Some of the fanfare of today’s better-than-expected outturn was uncorked in yesterday’s initial estimate for GDP growth.”

“For the third consecutive month, every major category of services spending moved higher. We also reached a milestone on the road to recovery as June marked the first month that services spending finally crested above its pre-pandemic level; in fact services spending is half a percentage point higher today than it was before the pandemic.”

“Last March and April, discretionary spending plummeted 54%, and has been clawing its way out on trend ever since. The transition to stronger spending here was evident in June as discretionary services rose 3.2% compared to a 0.5% gain in non-discretionary categories. That puts the peak-to-current figure at just 7.2% below their pre-pandemic level.”

“Personal income growth would have been stronger if it were not for dwindling stimulus. While overall personal income only rose 0.1% in June, if excluding transfer payments, income rose a stronger 0.7% over the month.”

“Still the overall trajectory of income growth will likely be flat to slightly down over the next four months or so. The confluence of factors from the expiration of all enhanced unemployment benefits in early September and PPP loans rolling out of proprietors income will more than offset upward momentum from employee compensation and the enhanced child tax credit being sent to many households. But, once stimulus rolls out of the income calculations, we expect income growth to settle on a more normal upward trajectory.”

Next week, the Bank of England (BoE) will have its monetary policy meeting. No change is expected. According to analysts from TD Securities, the outcome should not offer a strong directional cue for the pound. They expect the currency to remain in familiar ranges. 

Key Quotes: 

“We look for the MPC to keep policy unchanged at this meeting, despite recent hawkish sentiment from two members. While wage and inflation dynamics remain strong, there are early signs of a slowdown in demand. The QE decision will likely not be unanimous.”

“We do not expect the August MPC meeting to provide a strong directional cue for GBP, particularly as FX markets have been content to shrug off stronger policy signals elsewhere. GBP’s sensitivity to risk appetite is high and spot is close to near-term FV (fair value) on our dashboard. This should see GBP anchored to familiar ranges as summer trading conditions prevail.”

“Duration remains vulnerable to the pace of BoE buybacks in the coming months. We prefer going into the meeting with a steepening bias for the front-end and curve.

The Eurozone registered a GDP growth of 2% during the second quarter after two quarters of contraction. The reopening of Eurozone economies since end Q1/early Q2 has spurred economic activity, point out Rabobank analysts. They see the main risk to the short-term outlook steming from the highly contagious Delta variant.

Key Quotes: 

“The recovery in the services sector should be sustained in the coming quarters, on the back of rising vaccination rates and the accompanying gradual return to normal (58% of the EU population has had at least one shot and 48% is fully vaccinated). In addition, uninterrupted strong order books in the manufacturing sector, improving global trade and the Next Generation EU support the outlook. Furthermore, the ECB Bank Lending Survey suggests that demand for business loans in the Euro area is starting to be more driven by investment intentions again, rather than building liquidity buffers, after this was disrupted by the pandemic.”

“The main risk to the short-term outlook stems from the highly contagious Delta variant which has been slowing the phasing out of lockdown measures and has already even caused governments to rollback relaxations and tighten international travel restrictions.”

“Yet, so far the overall macro-impact of the Delta variant seems to be limited still in most countries.”