Pound-Euro Week Ahead Forecast: Supported Near 1.1630 but Struggling for Traction at 1.17

- GBP/EUR may struggle to advance beyond 1.1700
- Quiet UK calendar sees GBP consolidation continue
- Supported at 1.1630 but risking 1.1550 mult-week

Image © Pound Sterling Live

• GBP/EUR reference rates at publication:
• Spot: 1.1664
• Bank transfers (indicative guide): 1.1356-1.1437
• Money transfer specialist rates (indicative): 1.1560-1.1580
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Pound-to-Euro exchange rate stabilised heading into the holiday-shortened week but could struggle over the coming days to get past the 1.17 handle as the market continues to adopt a cautious approach toward Sterling pending clarity on the further development of the UK’s economic recovery.

Pound Sterling rose tepidly against the Euro and other low yielding currencies last week while ceding ground to many of those offering higher returns or faster economic growth prospects after being invited into a period of consolidation following the latest batch of economic data out of the UK.

Recent data has offered a series of indications that UK growth momentum may have slowed early in the current quarter following a strong rebound linked to the earlier reopening of the economy, one that made the UK the fastest growing economy in the developed world last quarter but did not meet the slightly more upbeat expectations of the Bank of England (BoE).

“Nearly all the near-real-time activity indicators we track have improved this month, having stabilised or softened in July,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. “Month-to-month growth, however, likely won't improve significantly on August's pace in the coming months.”

Above: Pound-to-Euro exchange rate shown at daily intervals with major moving-averages and Fibonacci retracements of July’s rebound indicating possible areas of support.

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The big driver of the currency market last week and possibly also over the coming days was the twists and turns of the Dollar, which saw heavy losses across the board on Friday during which the Pound advanced against the Euro but ceded ground to many others in the G10 segment of major currencies.

The Dollar fell and other currencies rose including Sterling after Federal Reserve Chairman Jerome Powell confirmed that a tapering of the bank’s quantitative easing programme is likely to begin before year-end, but emphasised that this does little if-anything to bring forward the timing of an initial U.S. interest rate rise, which guidance suggests is unlikely before the end of next year at the earliest.

“BOE pricing is tracking alongside Fed pricing on the 2yr. But, in the front end, there is more priced for BOE hikes than the Fed,” says Jordan Rochester, a strategist at Nomura. “Given the BOEs MPC policy leanings, is this the right way to be? Perhaps it is. But there is now a hike priced in by August of next year. How much sooner can it be priced in for than that?”

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Generally and for the most part the market has bought currencies with central banks that have the next best prospects of lifting interest rates any time soon during periods when the Dollar has been falling, which is a big part of why the Pound edged higher against the Euro late last week.

Meanwhile, many of the above referenced currencies have also held up better in bouts of Dollar strength but there have been exceptions and the European single currency is one of them, which is why the Pound-to-Euro rate could potentially struggle if the Dollar rebounds over the coming days.

“Short EUR/GBP still makes sense from a real yield view, and this might be all that matters. However, the problem is that it is a very slow moving trade that has been range bound for quite some time now,” says Nomura’s Rochester, who sees GBP/EUR rising toward 1.2048 by year-end.

Above: Pound-to-Euro rate shown at daily intervals alongside GBP/USD and EUR/USD.

The Pound-to-Euro rate always closely reflects the relative performance of the main Sterling and Euro exchange rates GBP/USD and EUR/USD, and would rise to 1.1690 this week if a softer Dollar saw the latter two advancing to their nearest technical resistance levels around 1.3802 and 1.1802 respectively, and it may even reach 1.1697 if subsequent GBP/USD and EUR/USD resistances at 1.3839 and 1.1831 are tested.

But uncertainty about the pace of the UK’s economic recovery, inflation developments and their implications for BoE interest rate policy further down the line could all mean the Pound struggles to keep the market interested at and above those kinds of levels.

“EUR/GBP consolidated last week and remains upside corrective, and for now we maintain a near term upside bias. We note that the intraday Elliott wave counts are positive and would allow for a move to .8620 and possibly to .8671 the July 2021 high [GBP/EUR fall to 1.1600 and 1.1532],” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: Pound-to-Euro exchange rate shown at daily intervals with possible areas of support marked out by major moving-averages and Fibonacci retracements drawn from intraday low on February 04, the date of an important BoE policy announcement.

Jones and the Commerzbank team told clients this week the Pound-to-Euro rate is likely to draw in speculative sellers the entire time it’s below 1.1730 and are looking for an eventual decline to 1.1560, which could happen either if the Euro strengthens notably, Sterling weakens markedly or in the event of another global market sell-off that lifts the Dollar sharply while impacting the funding currency Euro less than it does the Pound.

The Pound-to-Euro rate could be fortunate in the meantime to be able to count on the tried and tested support of its 100-day moving-average at 1.1635, which coincides with a number of Fibonacci retracement levels.

“Overall, we see EA inflation staying on a rising trajectory between August and November amid prevailing supply-demand imbalances, increased sellers' pricing power as well as improving technical effects,” says Silvia Ardagna, chief European economist at Barclays, in a research note on Friday

There are no major or market relevant economic figures due from the UK in the week ahead, although across the English Channel the highlight is inflation data for August, which is out on Tuesday at 10:00.

Economists have widely suggested that a further temporary leap above the 2% target of the European Central Bank could be likely, though it’s not obvious this would do much for the Euro given the ECB’s doubts about whether economic conditions are sufficient to ensure its target can be sustainably delivered over the longer-term.

This in turn may mean the ebb and flow of market appetite for the Dollar is again the dominant driver of exchange rates in the week ahead.

Above: Pound-to-Euro exchange rate shown at daily intervals with possible areas of support marked out by major moving-averages and Fibonacci retracements drawn from 2021’s low on January 06.