Pound / Euro Week Ahead Forecast: Eyeing 2021 Highs but Facing Obstacle On Charts

• GBP/EUR looks to hold 1.18, struggles at 1.1869
• After six-day rally stalled at resistance on charts
• May have scope to retest 2021 highs multi week

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The Pound to Euro exchange rate entered the holiday shortened week with technical resistance obstructing its path back above 1.19 on the charts, although there may now be scope for Sterling to retest is 2021 highs in the new year.

Sterling entered the holiday shortened week as the best performing major currency for the prior period following a six day rally that lifted the Pound-to-Euro rate more than one percent for the week to Tuesday.

The Pound has now reversed most of the losses sustained after November’s emergence of the Omicron variant led markets to doubt earlier assumptions about interest rates at the Bank of England (BoE) next year.

Investors revived their expectations of a steep 2022 increase in Bank Rate last week after further studies suggested the Omicron strain could pose a lesser threat to public health than its predecessors, helping to extend the Pound-Euro rate’s December recovery along the way.

“As we had expected, the move in yields is pulling the EURGBP toward the 0.84 level [GBP/EUR toward 1.1904],” says Juan Manuel Herrera, a strategist at Scotiabank, in a note last week. “Look for the GBP to remain well supported on short-term dips against the EUR as well.”

Above: Pound-to-Euro rate shown at daily intervals with Fibonacci retracements of November decline indicating likely technical resistance.

• Reference rates at publication:
  GBP to EUR: 1.1870
• High street bank rates (indicative): 1.1555 - 1.1638
• Payment specialist rates (indicative: 1.1787 - 1.1811
• Find out more about specialist rates, here
• Set up an exchange rate alert, here

Sterling’s rebound dates back to mid month when official data showed inflation topping 5% for November and employment going unaffected by September’s end of the HM Treasury furlough scheme, ultimately triggering December’s BoE decision to lift Bank Rate to 0.25%.

Financial markets have since wagered that the BoE could be likely to lift Bank Rate to a post financial crisis high of 1.25% next year, while in the process helping Sterling to paint what has become a bullish picture on the charts since its rise above 1.1781.

“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} and then a retest of the .8377 YTD low [GBP/EUR high: 1.1937},” says David Sneddon, head of technical analysis strategy at Credit Suisse in a note ahead of the festive break.

The rise above 1.1781 potentially invites the Pound-to-Euro rate back toward late November’s highs above 1.19, although it has been stalled by a technical resistance level at 1.1869, which coincides with the 78.6% Fibonacci retracement of November’s slide from 1.1932.

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This could potentially act to frustrate Sterling’s recovery further this week, which is devoid of major appointments in the economic calendar but could see some outsized moves due to holiday related reductions in trading volumes.

Once into the new year much will also depend for Sterling on the scale of the burden imposed on the economy by the Omicron strain of the coronavirus, and any knock-on impact on the market’s outlook for interest rates at the BoE, which are widely expected to rise to 0.50% in February.

“The near-term outlook for the UK economy remains in limbo as we wait to see the extent to which the Omicron variant increases the pressure on health services. The level of infections and the severity of illness will be key,” says Andrew Goodwin, chief UK economist at Oxford Economics.

“High-frequency data continues to show much lower levels of activity in social consumption sectors. Restaurant bookings in London have been particularly badly hit. While that partly reflects the reimposition of guidance to work from home, it is also likely to be a function of higher case numbers in the capital and the impact that has had on confidence and mobility,” Goodwin wrote in a Thursday research note.

Above: GBP/EUR shown at daily intervals alongside EUR/GBP.