Euro Upside Limited say UBS (THIS as EUR/USD and EUR/GBP Surge Higher During Tuesday Trade)

It is hard to really read too much into today's currency market action ahead of tomorrow's big event, but a look at the latest spot market rates shows the Euro is the runaway winner.

Euro Upside Limited say UBS

Despite the majority of euro exchange rates surging higher today, analysts at UBS warn that upside will likely be limited.

Mansoor Mohi-uddin at UBS has today told clients:

"Despite stronger data, the euro remains within its six month 1.28-1.34 trading range. European Central Bank officials have been largely absent during the summer. But we expect policymakers to step up their commentary as their return from their holidays.

"In particular the ECB Governing Council meeting on September 5 is likely to see President Draghi stress again the central bank's forward guidance of keeping interest rates at current levels or lower for an extended period. At the meeting, the ECB will also release its latest economic forecasts. These should reflect the pickup.

in cyclical data over the last couple of months.

"But with the ECB already anticipating a modest recovery driven by exports, policymakers will not want to see a stronger euro or Eurozone bond yields keep tracking US yields higher.

"We thus see limited upside for the euro from current levels unless the Fed chooses not to taper its asset purchases this year.

"Instead, we expect the single currency will fall back towards the bottom of its current range at 1.28 against the greenback as summer trading ends, the ECB maintains a dovish stance and the Fed reduces its bond buying.

"That divergence in time is likely to push the euro back down to our longer term target of 1.20 against the greenback."

Euro Exchange Rates Supported by Stronger Data

For now the euro continues to benefit from the cyclical pick up in Eurozone data. After six straight quarters of recession, the single currency area has at last returned to growth.

In Q2'13 the Eurozone expanded by 0.3%q/q. France and Portugal surprised strongly, growing by 0.5%q/q and 1.1%q/q respectively. German GDP also beat expectations up 0.7%q/q. But Italy and Spain recorded another quarter of contraction.

Industrial production also expanded by 0.7%m/m for the single currency area in June and 4.8%q/q. This data was already foreseen in the recent stronger monthly PMI prints across Europe. In the week ahead, August's flash PMI estimates will be released for the Eurozone, Germany and France.

That will show whether the cyclical bounce in the region is continuing.