Pound-Euro Week Ahead Forecast: Buoyant but Struggling Above 1.17 as BoE and PMI Data Eyed

- GBP/EUR supported at 1.1695, 1.1652 & 1.1608
- Consolidation likely into BoE decision & PMI data
- Struggle above 1.17 risks cultivating range trade

Image © European Commission Audiovisual Services

• GBP/EUR reference rates at publication:
• Spot: 1.1715
• Bank transfers (indicative guide): 1.1390-1.1487
• Money transfer specialist rates (indicative): 1.1610-1.1656
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Pound-to-Euro rate edged higher despite Sterling being one of the poorer performing major currencies last week and so may remain buoyant over the coming days, albeit that upside is likely to be limited ahead of Thursday’s Bank of England (BoE) decision.

Sterling was a straggler among major currencies having eked out gains over only the Swiss Franc, Euro and Australian Dollar within the G10 contingent, with the bulk of this underperformance taking place in the final hours of trading on Friday.

The Pound-to-Euro rate was little changed however, closing 0.07% higher at 1.1715 after holding onto gains made in the prior week, although some analysts say that a persistent inability to sustain rallies above 1.17 indicates that a sideways range trade could be likely this week.

“This is currently indicated to be the end of wave 4 and we will cautiously start to cover our short positions as we are concerned that we will just see more ranging. Below here lies key support is .8471/49 [GBP/EUR: 1.1800/1.1845], the recent low and lows since 2019,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to EUR/GBP.

Jones and the Commerzbank team flag 1.1600 as an area of firm technical support that could arrest any falls seen over the coming days, which translates into resistance around the .8615/20 area for EUR/GBP.

Above: Pound-to-Euro rate shown at daily intervals with 55 & 100 day moving-averages as well as Fibonacci retracements of April recovery indicating possible areas of technical support that could break falls in GBP/EUR.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

Above and ahead of the major support level at 1.1600, the Pound-to-Euro rate may also be able to use its 55 and 100 day moving-averages at 1.1696 and 1.1661 respectively as buoyancy aids, in addition to Fibonacci retracements of April’s recovery at 1.1695, 1.1652 and 1.1608.

“Inflation came in modestly higher than the BoE’s forecast for August, and is expected to rise towards a peak of around 4% later this year. At the same time, activity data over the summer months has disappointed including monthly GDP growth for July and retail sales for August,” says Lee Hardman, a currency analyst at MUFG, in a Friday research note. “We expect the BoE to acknowledge that Q3 GDP growth is likely to be weaker than expected.”

“The combination of slower growth and higher inflation creates a less favourable mix for the GBP, and with BoE rate hike expectations already well priced in for the next year. A stronger hawkish signal from the BoE will be required for the GBP to break through key resistance levels,” Hardman adds.

Sterling has remained buoyant in recent trading but recent data has encouraged the notion that the economy has reached a bumpier and less assured stage of its path toward recovery, including Friday’ retail sales figures that revealed a second consecutive decline in sales for August.

“I think we are seeing some flattening out of the rate of recovery. Actually across quite a broad range of indicators that we look at,” Governor Andrew Bailey told parliament’s Treasury Select Committee in August. “We don’t have a precise story to tell to explain it.”

{wbamp-hide start}

{wbamp-hide end}{wbamp-show start}{wbamp-show end}

Recent data has led analysts and economists to suggest the economic recovery could underperform BoE forecasts for this year, albeit only slightly, although it’s not clear that this will be enough to deter the BoE from a policy course that has so-far been supportive of Sterling.

For a start, Governor Bailey and colleagues already acknowledged signs of slowing pace of recovery in testimony to parliament’s Treasury Select Committee on August 31, where they also reminded the market that inflation is expected to rise to 4% or more later in 2021 and that it could be necessary to lift Bank Rate from 0.1% as soon as 2022 in order to ensure it returns to the 2% target by the end of the forecast horizon.

“While recent growth data has been weaker-than-expected and some uncertainty remains about the unwinding of the furlough scheme this month, labor market data have been stronger than expected,” says Michael Cahill, a G10 FX strategist at Goldman Sachs. “Inflation has surprised to the upside, and recent hawkish comments from BoE Governor Bailey and Deputy Governor Broadbent have suggested that the conditions for tightening have been met.”

The BoE’s somewhat ‘hawkish’ stance has placed it on course to potentially be one of the first major central banks to lift interest rates following the coronavirus crisis, which has supported the Sterling in recent months and prompted Goldman Sachs to lift its forecasts last week.

Analysts at the bank now see the Pound-to-Euro rate rising to 1.19 in six-months time and remaining around or within reach of that level over the coming 12 months, which reflects an upgrade from six and 12 month forecasts of 1.1764 and 1.1494 respectively.

Above: Pound-to-Euro rate shown at weekly intervals with major moving-averages.

While retail sales figures disappointed the market last week and July GDP underwhelmed many forecasts, other data has indicated that the economy continued to recover robustly during the third quarter and that it may have scope to go on doing so for a while yet.

“Some of the latest economic data suggested an economy running increasingly hot,” says Andrew Goodwin, chief UK economist at Oxford Economics. “A strong performance from the jobs market over the summer was one sign of things heating up.”

UK employment has recently returned to its pre-coronavirus level and with job vacancies at record highs in July, it’s possible that unemployment could fall further in the months ahead even after the government furlough scheme has wound down, which would support the wider economic recovery.

Nonetheless, uncertainty about the outlook and the possible implications for BoE policy could be enough to ensure that Sterling struggles to advance meaningfully over the coming days, and could potentially even see the Pound softening ahead of Thursday’s 12:00 decision.

The BoE’s update is the highlight of the week for the Pound, although before then IHS Markit PMI surveys of the services and manufacturing industries will be released at 09:30 on the same day, and will likely be scrutinised closely by the market for clues on the pace of recovery in September.

“We're expecting a drop in both services and manufacturing – both likely, we think, to be hit by supply side constraints. Our high frequency geolocation trackers are consistent with slowing momentum. We see the PMI manufacturing print dropping to 59.4 and the services print falling to 54,” says Sanjay Raja, an economist at Deutsche Bank.