GBP/EUR Week Ahead Forecast: Stalling as UK Data Deluge Looms

• GBP/EUR recovery rally could stall near 1.1827
• BoE policy limitations & UK data deluge in focus
• MPC testimonies & UK CPI potential headwinds 
• Shanghai reopening plan potentially supportive 

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The Pound to Euro rate ended last week with a sharp rally from seven month lows but it could be likely to stall around the nearby 1.1827 level this week in which parliamentary testimonies from Bank of England (BoE) policymakers and a deluge of UK economic data are the highlights for Sterling. 

Pound Sterling had struggled against the Euro throughout much of last week as stock markets and some commodity prices slumped in response to escalating investor concerns about the outlook for the global economy and amid an extended slide in China’s widely influential Renminbi.

But the Pound to Euro exchange rate stabilised after Ukraine’s national gas pipeline operator halted some flows from Russia to Europe and following the Kremlin’s decision to ban sales of gas and other transactions with a handful of important European firms. 

The subsequent recovery in Sterling built further on Friday when stock markets rose across the globe as the U.S. Dollar softened and the Renminbi stabilised, although the Pound to Euro exchange rate may struggle to extend that rebound beyond the nearby 1.1827 level in the days ahead.

“We’ll need to see a material stabilisation in sentiment in the coming days to actually reverse some of the recent FX moves,” says Chris Turner, global head of markets and regional head of research for UK & CEE at ING. 

Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of March fall & 200-day moving-average indicating prospective areas of technical resistance for Sterling and support for Euro. Click image for closer inspection.  

“EUR/GBP may remain close to the 0.8500 mark [GBP/EUR: 1.1764] (as the euro is facing weak momentum of its own), although we see greater potential for a return to 0.8600 [1.1627] rather than a drop to 0.8400 [1.1904] in the near term,” Turner and colleagues also said on Friday. 

Friday’s recovery in risk appetite and global financial markets could extend this Monday, with many currencies likely benefiting after authorities in China announced at the weekend that the country’s largest city Shanghai would begin a phased reopening from ‘lockdown’ this week. 

The six week shutdown in the city, which is home to China’s largest and the world's most important seaport, has been a significant source of financial market risk aversion since the early days of April so any signs of a return to business as usual are a potentially significant filip for market sentiment and the global economic outlook. (Set your FX rate alert here).

But for Sterling there is a danger that its rally is cut short if Monday’s Monetary Policy Report hearing in parliament reminds investors and traders of the extent to which market expectations for Bank of England interest rates are likely to end up being disappointed in the months ahead. 

“The consumer outlook has taken a big turn for the worse, as the real income squeeze bites hard. This will make it very difficult for the Bank of England to deliver anything close to what is priced into the forward rates market,” says Dominic Bunning, head of European FX research at HSBC. 

Above: GBP/EUR at daily intervals and shown alongside China’s Renminbi-Dollar rate and Europe’s Euro-Dollar rate. Click image for closer inspection.  

“While our economists do expect another two 25bp hikes in Bank Rate to 1.50% by the summer, the market sees rates moving above 2% by mid-2023. It is notable to us that the BoE has actually pushed back quite aggressively against this market pricing,” Bunning and colleagues also said. 

Last week’s GDP report suggested the UK economy grew by 0.8% in the opening quarter, which was below market expectations for a growth rate of 1.1% and weaker than even the more modest estimation of the Bank of England, which had envisaged a quarterly expansion of 1%.

That further hinted of tough times ahead for the UK economy barely a month after Office for National Statistics figures revealed a sharp slump in retail sales for the month of March, all of which has prompted economists to cut their remaining forecasts for the UK economy. 

“The GDP print in terms of the growth narrative was grim. It seems likely that Q2 GDP will be negative while the backdrop for Q3 and Q4 also looks challenging unless the government is prepared to provide something of a fiscal boost,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets. 

“We remain wary of what is priced into the GBP rates strip as we would not anticipate the BoE hiking another 100bps this year, despite the comments from the BoE’s Ramsden yesterday,” Stretch wrote in a Friday market commentary.

Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of 2020 recovery and various extensions thereof indicating prospective areas of technical support for Sterling. Click image for closer inspection.

While Monday afternoon’s parliamentary testimonies from BoE policymakers are highly important for Sterling, there is also a deluge of key economic figures due to be released throughout the week ahead including the latest employment numbers on Tuesday and April’s inflation data on Wednesday. 

“We expect April CPI to leap to 8.9% y/y (from 7% in March), largely reflecting the 54% rise in household energy bills (the next increase will be in October). We expect April to be the peak,” says Abbas Khan, an economist at Barclays. 

“In contrast, the Bank of England forecast the peak in Q4 at above 10%. The difference reflects the Bank's assumption of more persistent inflationary dynamics, which likely is a result of its emphasis on surveys of firms, which feel confident passing on higher costs, even though the bleak outlook from household surveys suggests this may not be as easy,” Khan added on Friday.

Of all the economic figures due out this week, Wednesday’s inflation number are likely the most important but these are also potentially a headwind for the Pound to Euro exchange rate given the Bank of England’s recent pushback against market expectations for interest rates.

This pushback makes perilous business out of financial market wagers on further increases in Bank Rate and so could limit, if not completely undermine the Pound’s ability to benefit from any upside surprise on Wednesday.