Forex Market: EUR/GBP slides to 2 1/2-week lows, Pound supported by optimism over economic recovery, Brexit talks

Sterling advanced for a second straight day on Tuesday, pushing EUR/GBP down to lows not seen since mid-May, as support was drawn from investor confidence over economic recovery after Britain eased certain lockdown restrictions and the latest PMI data from the UK met market expectations.

A report by IHS Markit/CIPS on Monday showed that activity in UK’s manufacturing sector had contracted for a third straight month in May, but yet, the rate of contraction was much slower compared to April. The respective PMI came in at a final reading of 40.7, up from a preliminary estimate of 40.6, as production, new orders and export sales dropped less sharply compared to April’s record contraction rates.

Meanwhile, manufacturing activity in the Euro area also contracted at a slower pace in May from a month ago, but missed the median analyst estimate. Production and new orders dropped at a softer rate, while companies in the sector continued to reduce staffing levels and pare down purchasing as average lead times deteriorated.

Market focus will likely once again shift to Brexit negotiations, with news that UK Prime Minister Boris Johnson intending to meet with European Commissioner Ursula von der Leyen later in June providing additional support for the Sterling. Britain has a deadline until July 1st to demand an extension to the current transition period, which is due to end in December.

As of 7:14 GMT on Tuesday EUR/GBP was losing 0.42% to trade at 0.8877, after earlier touching an intraday low of 0.8867, or a level not seen since May 15th (0.8829).

In terms of economic calendar, at 8:30 GMT today Bank of England will release its monthly report on mortgage approvals for April. The median estimate by experts points to a drop to 22,551 approved mortgages from 56,161 mortgages in March. The latter has been the lowest number of mortgages approved for house purchase since March 2013.

Bond Yield Spread

The spread between 2-year UK and 2-year German bond yields, which reflects the flow of funds in a short term, equaled 65.7 basis points (0.657%) as of 6:15 GMT on Tuesday. It has been the highest spread since May 18th (69.2 basis points).

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.8941
R1 – 0.8980
R2 – 0.9046
R3 – 0.9085
R4 – 0.9124

S1 – 0.8876
S2 – 0.8837
S3 – 0.8772
S4 – 0.8706

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