Pound-Euro Week Ahead Forecast: Slowing to a Crawl as Data Minefield Looms

- GBP/EUR steadying & well supported above 1.17
- But shifts into a crawl speed as data deluge looms
- Jobs, CPI & retail sales put colour on Q3 economy
- After strong Q2 neglects to bolster BoE rate bets

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• GBP/EUR reference rates at publication:
• Spot: 1.1757
• Bank transfers (indicative guide): 1.1450-1.1530
• Money transfer specialist rates (indicative): 1.1650-1.1675
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• Set up an exchange rate alert, here

The Pound-to-Euro exchange rate came off the boil ahead of the weekend and could now struggle for fresh momentum over the coming days as Sterling navigates a minefield of UK economic data littering the path ahead, although it remains well supported above the nearby 1.17 level.

Sterling traded heavily in the final half of last week after the UK’s second-quarter GDP report from the Office for National Statistics saw investors disincentivized from wagering more heavily that an interest rate rise could come from the Bank of England (BoE) before the end of 2022.

The data was strong with the UK economy having grown by 4.8% on the quarter, which was in line with market expectations but a tad less than the 5% anticipated by the BoE, meaning it did nothing to bring forward the time at which market’s see the BoE as likely to begin lifting Bank Rate.

This had Pound-to-Euro exchange rate correcting lower from multi-year highs around 1.1836 early on Thursday to 1.1750 at the opening of the new week, although some analysts see it as likely to stabilise over the coming days in what is a busy period for UK economic data.

“It may be too early to see the pound regaining its previous bullish steam, but we would expect at least some stabilisation, and EUR/GBP may well break back below 0.8500 [GBP/EUR above 1.1764] in the week ahead,” says Chris Turner, EMEA regional head of research at ING.

“We’ll see UK inflation bouncing around this summer. That should not have a long-lived market impact, as the Bank of England is mostly focused on inflation dynamics in 2022. “Finally, retail sales may have declined modestly in July as the Deltavariant impact may start to be felt,” Turner adds.

Above: Pound-to-Euro rate shown at daily intervals with key moving-averages indicating possible areas of support and Fibonacci retracements of April’s resumed uptrend indicating further areas of possible support.

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Sterling benefits from a thicket of technical support levels near to its opening for the week that could potentially serve to arrest its fall in the event of any disappointing economic data on Tuesday or Wednesday, and is still tipped by a range of analysts for further eventual gains during the weeks ahead.

“We continue to look for a clear and sustained move to a new low for the year below .8471 [GBP/EUR above 1.1804] to finally confirm our long-looked for large bearish “triangle” continuation pattern. This should then confirm the core trend has turned lower [GBP/EUR higher] again,” says David Sneddon, head of technical analysis at Credit Suisse, referring to EUR/GBP.

Of note in the calendar this week are Wednesday’s inflation figures for July, which will provide the market with insight into the pace at which UK price pressures are likely to overshoot the BoE’s 2% target over the coming months.

Consensus looks for the main consumer price index and the core consumer price index to rise to 2.3% and 2.1% respectively, although with the BoE already having tipped a likely increase to 4% by year-end it’s not clear that upside surprises would be able to deliver sustainable gains for Sterling.

“A strengthening economic recovery and building upside risks to their inflation target should keep pressure on the BoE to tighten exceptionally loose policy,” says Lee Hardman, a currency analyst at MUFG.

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“We are maintaining a short EUR/GBP trade idea to reflect building confidence in our bullish outlook for the GBP,“ Hardman adds.

Wednesday’s prices data is the highlight for Sterling ahead of Friday’s retail sales report for July, but before then the Pound will likely take its cues from Tuesday’s jobs data for the same month, which is the most important of all those due in the week ahead.

The job data is due out at 07:00 on Tuesday and will be scrutinised closely by the market because the pace at which the labour market recovers from coronavirus-inspired disruption is a major uncertainty that could yet further influence how soon the BoE lifts interest rates in the coming years.

“We will be looking in particular at HMRC payroll numbers for July to assess the extent to which (if at all) the fall in furlough numbers in July represents workers who have remained in employment or who have been detached from their employer,” says Abbas Khan, an economist at Barclays.

“Further, with much of the economy opened up in June, we will be watching for any reductions in the elevated level of inactivity (c. 500k higher than the years immediately prior to COVID, see Figure 3) and, if so, whether they are moving into unemployment or employment,” Khan says.

Above: Pound-to-Euro rate shown at weekly intervals with key moving-averages indicating possible areas of support and Fibonacci retracements of referendum-induced depreciation indicating areas of possible resistance.