Synopsis:

ANZ anticipates continued challenges for both EUR and GBP in the near term due to economic softness and political uncertainties. While EUR downside is somewhat limited by expectations of a restrained ECB easing cycle, German political turbulence and weak PMIs could weigh further. For GBP, positioning unwinds and potentially softer inflation data could drive the currency toward 1.25 against the USD.

Key Points:

EUR Outlook:

1. Impact of US Policies: Proposed tariffs by the incoming US administration could harm the EU’s fragile GDP recovery, maintaining a negative backdrop for EUR/USD.
2. Political Uncertainty: German elections in March risk further EUR downside, particularly if a hung parliament exacerbates EU political uncertainty.
3. ECB Easing Expectations: Market pricing suggests 140bps of ECB rate cuts into mid-2025. A shallower easing cycle could limit EUR/USD downside, supporting ANZ’s year-end forecast of 1.10 for the pair.
4. November PMIs: Upcoming data is likely to underscore weak EU growth, further pressuring the euro.

GBP Outlook:

1. Positioning and Market Dynamics: GBP is vulnerable to further declines as net long positioning unwinds, potentially exacerbating losses.
2. CPI and Growth Concerns: Next week’s UK CPI is unlikely to offer support, as softening services inflation could increase downside risks for GBP/USD.
3. PMI Trends: PMIs indicate weaker UK growth momentum and easing inflation pressures, adding to GBP's vulnerability.
4. Near-Term Targets: GBP/USD is expected to decline toward the 1.25 range in the coming week.

Conclusion:

ANZ sees the EUR and GBP facing near-term headwinds, with weak economic data and political uncertainty creating an unsupportive backdrop. While EUR/USD downside is somewhat contained by restrained ECB expectations, GBP is poised for sharper losses as positioning unwinds and softer inflation data weigh on sentiment.