GBP/EUR Week Ahead: Tantalisingly Close

• GBP/EUR close to fresh multi-month highs
• But significant resistance blocks the way
• This week's wage and GDP data holds the key

Image © Adobe Images

The start of the new week sees the Pound to Euro exchange rate hold onto Friday's 0.45% rally, underpinning an increasingly constructive technical setup. However, significant technical resistance is close at hand, and we are wary of a reversal of recent gains should this week's UK data disappoint.

Pound Sterling is now firmly back in the upper echelons of its 2024 range against the Euro and we are very much aware that another test of the 2024 highs at 1.1765 is a highly likely prospect.

We are also acutely aware that breaking above this level (a breakdown of the big 0.85 figure in Euro-Pound) will be difficult to achieve.

In fact, daily closes above the 1.1730 level have been very rare in the 2023-2024 period, and we note that the pair has only closed above here on three occasions since 2023.

Above: Closes above 1.1730 are rare in the context of 2023-2024 trade. Track GBP and EUR with your own custom rate alerts. Set Up Here

Therefore, we suggest these are excellent levels for those buying euros. Those with a risk-conscious approach to the market should consider taking a portion of exposure at these levels in the event that resistance is reinforced by another pullback.

Of course, we could see fresh highs achieved this week, but much will hinge on what happens on Tuesday and Wednesday as markets consider the first major data releases of March.

The British Pound is 2024's best-performing G10 currency amidst improved sentiment towards the UK economy, which is widely expected to have exited an H2 2023 recession in light of a widespread improvement in UK economic survey data.

"Dare I say it, the pound’s rally is also a sign of confidence in the UK, after a fairly dismal few years," says Kathleen Brooks, an analyst at XTB.

Markets also see the Bank of England potentially cutting interest rates after the Federal Reserve and European Central Bank, which underpins UK bond yields relative to elsewhere and drives demand for Pound Sterling.

The risk is that this narrative is questioned by incoming data encouraging the market to raise bets for a June rate cut, prompting an unwind of recent outperformance. Even a slight miss could offer a decent move unwind of recent gains.

With this in mind, all eyes will fall on Tuesday's UK wage data, where any undershoot would prompt a potentially notable pullback in Pound-Dollar and other Pound exchange rates.

Above: UK wages are expected to trend lower. Image: UniCredit.

The market looks for a 5.7% increase for January (when bonuses are included) and a 6.2% increase when bonuses are excluded.

Keep an eye on Wednesday's release of monthly GDP figures. For January, a figure of 0.2% month-on-month is expected.

Any above-consensus print in either the GDP or wage figures could help the Pound on its journey higher.

Above: UK GDP is expected to have risen in January. Image: UniCredit.

"The quality of the data will likely inform the MPC decision as its members debate the appropriateness of the current policy stance. With that in mind, evidence that the UK economy rebounded at the start of 2024 while the UK labour market remained tight could be seen as delaying any decision to lower rates from here and thus could help boost the rate appeal of the GBP," says Valentin Marinov, head of FX research at Crédit Agricole.

There are no major releases from the Eurozone this week, but we suspect the global setup will also matter for Pound-Euro. We suspect that a great deal of last week's outperformance by Pound Sterling owes itself to broadly constructive global investor sentiment.

Softer-than-expected U.S. wage numbers boosted market bets the Federal Reserve would be in a position to cut rates in June, which would lower the cost of finance not just in the U.S. but globally.

The Pound is traditionally considered a risk-on currency in that it appreciates against the Euro and Dollar when market sentiment is supportive.

If equity markets can continue their ascent, we would expect Pound-Euro to remain pointed to the upside. Any setback in sentiment can reinforce technical resistance and prompt a pullback.