EUR/GBP slides to one-year low on weaker German PMIs, shows resilience below 0.8500

• EUR/GBP drifts lower for the second straight day and drops to a one-year low on Wednesday.
• The disappointing German PMIs reaffirm bets for the ECB rate hike pause and exert pressure.
• Bets for more rate hikes by BoE support prospects for a further near-term depreciating move.

The EUR/GBP cross comes under heavy selling pressure during the early European session on Wednesday and drops to a one-year low in reaction to the disappointing German PMI prints. Spot prices, however, manage to rebound a few pips in the last hour and currently trade with modest intraday losses, just above the 0.8500 psychological mark.

The preliminary business activity report from the HCOB survey showed that Germany’s manufacturing downturn eased a bit in August and the services sector unexpectedly contracted during the reported month. In fact, the HCOB Manufacturing PMI came in at 39.1 against the 38.7 expected and 38.8 reported in July. Adding to this, Services PMI dropped sharply from 52.3 to 47.3 in August, missing estimates for a reading of 51.5 and reaching a fresh nine-month low.

The data adds to worries about a deeper economic downturn and fuels speculations that the European Central Bank (ECB) will halt its streak of nine consecutive rate hikes in September. This, in turn, weighs heavily on the shared currency and drags the EUR/GBP cross sharply lower for the second successive day. That said, the emergence of some selling around the British Pound (GBP) lends support to spot prices and leads to a modest 15-20 pips bounce from the daily low.

The downside for the Sterling, however, seems cushioned in the wake of rising bets for more interest rate hikes by the Bank of England (BoE). In fact, the current market pricing indicates a more than 80% chance of a 25 bps lift-off at the next BoE meeting in September. This, in turn, suggests that the path of least resistance for the EUR/GBP cross is to the downside and any meaningful recovery attempt might still be seen as a selling opportunity.

Technical levels to watch