Last week, GBP's high sensitivity to risk asset performance was evident despite a relatively hawkish first rate cut by the Bank of England (BoE). GBP/USD is struggling to maintain its $1.27 support level, while GBP/EUR has fallen below €1.17 at interbank for the first time since May. However, the Japanese yen is the real standout, with GBP/JPY plummeting 13% since mid-July, including a 10% drop in just the past week, erasing all its year-to-date gains within weeks.

Markets had priced in a 60% chance of a BoE rate cut to 5%, and the BoE’s Monetary Policy Committee (MPC) voted 5-4 in favour of the cut last Thursday. Although a hawkish tone initially limited GBP's losses, gilt yields dropped to fresh one-year lows, and markets began anticipating more rate cuts by the BoE this year.

The EUR surged past the $1.09 mark on Monday as weak US NFPs and a higher US unemployment rate shook the markets. Meanwhile, EUR/JPY saw its worst monthly decline in eight years (-5.8%), and EUR/GBP fell for the fifth consecutive month in July, the worst streak since January 2020. Despite this poor performance, the EUR rallied to a one-month high by the end of the week, a delayed reaction to the BoE’s hawkish decision last Thursday.

This week’s economic calendar is light, with key items including final PMIs, Sentix Investor Confidence, German factory orders, and European retail sales. As we enter a seasonally quiet period for both data and ECB speakers, this could be beneficial for the EUR. The EUR has shown a strong positive correlation with a decrease in realised FX volatility, which may help support it during this lull in activity.