GBP/EUR Week Ahead Forecast: Supported Near 1.16 as Data Dominates
- Written by: James Skinner
-
- GBP/EUR supported near 1.16 with risk on upside
- German retail sales & European CPI data in focus
- After economic fears dent BoE, ECB rate outlooks
Image © Adobe Images
The Pound to Euro exchange rate has drawn bids from the market when near or below the 1.16 handle and could be likely to remain supported above this level during the week ahead in which market focus will likely be on central bank speeches and economic data due from the Eurozone.
Sterling held up well against the Euro throughout much of last week despite a series of UK economic numbers including inflation data for May forcing financial markets to crimp expectations for the Bank of England (BoE) Bank Rate at year-end, which fell from 2.94% to 2.73% by Friday.
“This week’s economic news didn’t appear to satisfy the criteria of “indications of more persistent inflationary pressures” that the Monetary Policy Committee (MPC) said last week would prompt it to act “forcefully,” says Paul Dales, chief UK economist at Capital Economics.
The Pound’s buoyancy last week potentially owes itself to an equally large fall in expectations for European Central Bank (ECB) interest rate following Thursday’s S&P Global PMI surveys, which would leave a lot about the GBP/EUR outlook to be determined by European data due for release this week.
“This week’s PMI surveys gave a laundry list of reasons to be pessimistic about the Euro area activity outlook, from the war in Ukraine to lockdowns in China to general economic uncertainty. We have some sympathy with this sentiment,” says Michael Cahill, a G10 FX strategist at Goldman Sachs.
“But, at the same time we find it hard to be outright bearish on the Euro when the ECB is on the brink of such a momentous policy change: exiting negative rates after eight years,” Cahill and colleagues said on Friday.
Sterling benefited visibly last week when S&P’s composite manufacturing and services PMI for the UK held steady for the month of June in contrast to its European counterpart, which tumbled further and in the process reversed much of its recovery from the winter’s ‘lockdown’ induced declines.
The Pound’s respite was short-lived, however, after May’s retail sales figures suggested the inflation hit to the UK’s consumer centric economy has been significant, leading Sterling to soften on Friday while also defining the context in which German retail sales data will be viewed this Thursday.
“Note that like-for-like sales at managed pub and restaurant chains in May were just 0.1% higher than three years ago, down from 2.0% higher in April, according to the Coffer CGA Business Tracker,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
“We expect retail sales volumes to rise slowly in Q3 and to be about 1% higher in Q4 than in Q2,” Tombs said on Friday, citing recent support initiatives from HM Treasury for expecting a steady rebound in retail spending later this year.
The week ahead is a quiet one for UK economic data but includes a series of important appointments for the Euro including Spanish and German inflation figures on Wednesday, which will inform market expectations for Friday’s Eurozone numbers, and retail sales data from Germany on Thursday.
Economists and financial markets will be looking to see if April’s -5.4% month-on-month decline in German retail sales deepened last month and this point, along with the inflation data out on Friday, potentially has the ability to further impact expectations for ECB interest rates in the months ahead.
“The high energy prices and the supply chain shortages continue to put pressure on the economy. It would seem that they do so more than had previously been thought. The PMIs for Germany and France recorded a surprisingly pronounced fall yesterday. Moreover, there is the risk of an energy crisis,” says You-Na Park-Heger, an analyst at Commerzbank.
“As a result of these bleak economic prospects, it might seem increasingly questionable whether the ECB will still be willing to actually take decisive monetary policy action against high inflation levels. It is already dropping behind the curve now. The bigger the economic concerns get the more cautious the ECB’s monetary policy reversal is likely to be, which is likely to put pressure on EUR,” Park-Heger and colleagues said on Friday.
Thursday’s German retail sales number will offer important insight into how Europe’s largest and generally most resilient economy is faring amid the commodity price shock but equally important will be whether this Friday’s Eurozone inflation figures follow in the direction of the UK’s.
This is because with Europe’s core inflation rate already far below that of the UK's and much less divorced from the ECB target than is the case with the UK and BoE target, the ECB may be much more susceptible to being blown off - or simply slowed down upon - the path toward policy normalisation.
It’s in this context that financial markets will likely listen closely on Wednesday to a panel discussion featuring ECB President Christine Lagarde, BoE Governor Andrew Bailey and Federal Reserve (Fed) Chairman Jerome Powell at the ECB’s annual conference on central banking in Sintra, Portugal.
But the big risk for this week is, if anything, on the upside for a Pound to Euro exchange rate that remains near its lowest levels for more than a year.
Above: Inflation and interest rates for G10 economies and Poland. Source: Pound Sterling Live et al.