Pound / Euro Week Ahead Forecast: Looking to Hold 1.17 as BoE Stance Supports

• GBP/EUR supported at 1.1741 & 1.1683
• Upside bias seen to prevail above 1.1683
• GBP finding support on BoE’s rate stance

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The Pound to Euro exchange rate has extended its recovery from early December’s lows and could have scope to hold above 1.17 over the coming days if Sterling continues to benefit from last week’s Bank of England (BoE) decision to begin lifting Bank Rate.

Pound Sterling entered the new week with little between it and a stronger Dollar in a contest for the mantle of best performing major currency over the prior week after catching a broad bid following the BoE’s surprise decision to lift Bank Rate from 10 basis points to 0.25% last Thursday.

Thursday’s rate rise was the first in a likely series of steps to withdraw the support provided through interest rate cuts at the onset of the coronavirus crisis in March 2020 and came hard on the heels of official data showing inflation topping five percent for November.

With inflation risks mounting and official figures also having confirmed the labour market weathered September’s end of HM Treasury’s furlough scheme, the BoE has taken the first step in a process that has gotten interest rate markets betting Bank Rate could rise as many as three times next year.

The market response lifted Sterling across the board and enabled the Pound to Euro rate to rise back above 1.17 in an extension of its recovery from early December lows near 1.1635, which has left a bullish impression on the charts.

“While GBP will continue to be influenced by global risk sentiment, and positioning-related flows could cloud the picture around year end, we think the negative views on Sterling are overdone, and the recent recovery against the Euro can extend,” says Michael Cahill, a G10 FX strategist at Goldman Sachs, writing in a Friday research commentary.

Above: GBP/EUR shown at daily intervals with major moving-averages indicating likely areas of technical support and resistance.

• Reference rates at publication:
  GBP to EUR: 1.1746
• High street bank rates (indicative): 1.1435 - 1.1517
• Payment specialist rates (indicative: 1.1640 - 1.1680
• Find out more about specialist rates, here
• Set up an exchange rate alert, here
• Book your ideal rate, here

"Recent covid developments have been worrisome, and are likely to have some impact on the economic outlook, but that is hardly a UK-specific phenomenon. And the Bank of England’s messaging over recent weeks has been clearer: the impact from omicron on activity is likely to be manageable, it could add to inflationary pressures and—most importantly—the economy has made a lot of cumulative progress,” Cahill and colleagues also.

Minutes of the BoE’s meeting warned that inflation would surprise strongly on the upside of its recent forecasts, likely reaching 6% by April 2022, and reiterated that further increases in Bank Rate are likely to be necessary to ensure inflation returns to the 2% target over the coming years.

Interest rate markets have since firmed up wagers that a series of increases in Bank Rate will be announced next year, taking the benchmark to 1% by year-end in a process that has lifted the Pound against most currencies including briefly above 1.18 against the Euro last week.

“Given the break higher in GBPUSD, the risk of a turn back lower in EURGBP has increased. A break below .8488/83 [GBP/EUR above 1.1781] would now complete a very clear intraday “head and shoulders top to curtail thoughts of a base. This would suggest a resumption of the broader downtrend and a move back to .8446 [GBP/EUR: 1.1839],” says David Sneddon, head of technical analysis strategy at Credit Suisse.

The Pound’s extended rebound from its 200-day moving average at 1.1684 and reclamation of 1.17 has left a bullish impression on the charts that ensures a continued upside bias while above its 200-day moving average at 1.1684, according to technical analysts at Credit Suisse.

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Sneddon and colleagues said last week the Pound should retain an upside bias while it remains above its 200-day moving average at 1.1684 but cautioned that a rise above 1.1781 would be necessary to indicate that a further extension of the uptrend is underway.

While Sterling had a supportive wind in its sails heading into the festive period, it potentially faces downside risks associated with coronavirus developments in the UK where weekend headlines suggest the government is facing a clamour from its advisers for more stringent restrictions on business activity and social contact as the Omicron variant digs its heels in across the country.

That would be a fresh headwind for the economy, which will be in focus again on Wednesday with the release of the final estimate of third quarter GDP growth, which is expected at 1.3% and forms the highlight of what is an otherwise quiet period for the UK economic calendar.

"The BoE clearly sent the message that members are ready to act to curb inflation. With the UK fighting one of the worst Covid waves in the developed world, this is indeed set to support GBP as virus-related news will continue to offer a bearish argument in the coming weeks," says Francesco Pesole, a strategist at ING.

"The risk in the longer run is that markets may have moved too quickly to price in hikes across the GBP curve – currently, nearly 100bp of tightening are expected for 2022. Our economist expects the BoE to pause in February, with two hikes in May and November. This means that the pound may suffer from some dovish repricing along the way, although that is a story for the new year," Pesole also warned in a Friday research note.

Above: GBP/EUR rate shown at daily intervals with Fibonacci retracements of September fall indicating likely areas of technical resistance.