GBP/USD, EUR/USD Forecast: Two Trades to Watch

GBPUSD struggles around 1.25 despite record wage growth

• UK unemployment rose to 4.3%
• UK wage growth hit 8.5%, a fresh record high
• GBP/USD struggles around 1.25

GBPUSD is just about holding above 1.25 after UK jobs data, as unemployment ticked higher and wage growth reached another fresh record high.

UK unemployment rose to 4.3%, in line with expectations, and up from 4.2%. However, wage growth, including bonuses, rose to 8.5% in the three months to July, up from 8.2% in the three months to June. Wage growth, excluding bonuses, was also higher at 7.8%.The figures show that earnings continue to increase at a record rate, which, coupled with falling inflation, means that people's real pay is outstripping inflation, giving them greater purchasing power. This will be even more true should next week’s inflation data show consumer prices cooling further below 7%. While this is good news for households, it's not good news for the Bank of England as it continues its fight against inflation.

The hot UK labour market puts the central bank in a tight spot ahead of the interest rate decision next week. Increased inflationary pressure on the economy keeps pressure on the BoE to raise interest rates further.

Overnight BoE monetary Policy Committee member Catherine Mann, a known hawk, signaled that she would likely support another interest rate increase and called for officials to “err on the side of tightening to prevent further persistent inflation from crystallising.”

Rather than rising on the prospect of another rate hike, the pound is struggling with the possibility of another rate hike hurting the economy further in the second half of the year.

Meanwhile, the US dollar is rising, reversing some of yesterday's losses as investors look ahead to Wednesday's inflation data. The data is expected to show that inflation rose again in August. However, core inflation cooled further.

GBPUSD forecast – technical analysis

GBP/USD trades below its multi-week falling trendline. The price is hovering around 1.25; a break below 1.25 exposes the 200 sma at 1.2430 before bringing 1.23, the May low, into play.

On the upside, should 1.25 support hold, buyers could look to rise above 1.2550 yesterday’s high on its way to 1.2640 last week’s high.

EUR/USD falls towards 1.07 ahead of German ZEW economic sentiment data

• German ZEW economic sentiment -75 expected from -71.3
• ECB rate decision on Thursday on a knife-edge
• EUR/USD falls from the weekly high

EUR/USD is falling away from the weekly high reached yesterday amid a recovering US dollar and as investors look ahead to German ZEW Economic sentiment data, which is expected to show a deterioration to -75 in September from -71.3.

The data comes after German factory orders industrial production and business activity data disappointed last week, painting a gloomier outlook for the eurozone’s largest economy and a prolonged economic downturn in the year's second half.

The data comes ahead of Thursday's ECB meeting, as policymakers decide whether to raise interest rates again one last time. The decision rests on a knife edge as the ECB appears to be approaching the peak of its policy tightening.

Given widespread signs of an economic downturn, investors are doubting whether the central bank will be able to raise rates for a tenth time. The market is pricing around a 35% probability of the ECB raising its deposit rate by 25 basis points to 4%.

Yesterday, the European Commission downwardly revised its GDP forecast for this year to 0.8% from 1.1% to 1.3% from 1.6% in 2024.

The U.S. dollar is reversing yesterday's losses as it awaits inflation data on Wednesday. There is no high-impacting U.S. economic data due to be released today.

EUR/USD forecast – technical analysis

EUR/USD is falling from 1.0770, the overnight high, heading back towards 1.0685, the September low. The 20 sma is crossing below the 200 sma in a bearish sign, and the RSI supports further downside while it remains above oversold territory. Sellers need to take out 1.0685 to extend the selloff towards 1.0635, the May low.

Should buyers retake 1.0770, the next level of resistance could be at 1.08 last week’s high.