The Euro has dropped below 0.8700 against the British Pound due to worries about France’s new cabinet. This situation has made investors cautious, causing the currency to temporarily fall to 0.8685, as fears of a trade war between the US and China also impact market sentiment. In France, there are concerns about whether the cabinet can pass a budget given the divided parliament. At the same time, US-China relations are tense over trade restrictions, with the possibility of 100% tariffs, although both sides are trying to ease the situation.

Insights from the BoE

In the UK, Catherine Mann from the Bank of England (BoE) is discussing monetary policy, highlighting the importance of upcoming employment data. This information may influence BoE Governor Bailey’s speech set for Tuesday. The Pound Sterling, used in the UK, is the world’s oldest currency and the fourth most traded, with a daily trading volume of $630 billion. Its value mainly reflects the BoE’s monetary policies, which target a steady inflation rate of 2%. The UK economy’s health affects the Pound’s strength; positive economic data generally boosts its value, while a negative trade balance can weaken it. Key data such as GDP and trade balance serve as indicators of economic health, influencing the Pound Sterling’s value. The EUR/GBP has dropped below the important 0.8700 level, with weakness originating from Paris. Investors are uncertain about the new French cabinet’s ability to pass a budget, which is putting pressure on the Euro. Last week, the gap between French and German 10-year government bonds widened by 15 basis points to 65 basis points, a high not seen since the political turmoil of early 2024.

Impending UK Data and Eurozone Uncertainties

All eyes are now on tomorrow’s UK employment data and Governor Bailey’s upcoming speech. Last month’s August report showed UK wage growth stubbornly high at 5.8%, while the unemployment rate rose to 4.4%. This mixed data creates significant risks for the Pound, as a hawkish Bailey could easily change the current trend. With political uncertainty in the Eurozone and major data coming from the UK, we expect EUR/GBP volatility to increase sharply in the coming weeks. This could make buying straddles or strangles a good strategy to profit from large price movements in either direction, without guessing the result of Bailey’s speech. Implied volatility for one-month contracts has already risen to 8.2%, up from 6.5% two weeks ago. For those who are taking a position, the break below 0.8700, which had been a strong support level throughout 2024, is important. We believe that put options on the EUR/GBP provide a defined risk way to bet on further declines toward the 0.8600 support zone. However, if the UK’s job numbers come in weaker than expected, there could be a quick bounce back above 0.8700. Create your live VT Markets account and start trading now.

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