GBP/EUR Week Ahead Forecast: Confined by 1.1544 to 1.1695 Range
- Written by: James Skinner
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- GBP/EUR supported near 1.1544 & stymied near 1.17
- GBP/EUR could struggle for momentum above 1.1657
- Limited GBP & EUR differentiation hints of range trade
- With UK & Europe economies; BoE & ECB converging
- ECB minutes, BoE speeches, EU retail sales in focus
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The Pound to Euro rate has been almost volatile during recent trading but could be likely to find itself confined within roughly a 1.1544 to 1.1695 range during the week ahead as Sterling and the Euro increasingly lack differentiation from one another.
Sterling entered the new week near 1.16 and little changed from its prior opening level against the European single currency following choppy trading in which it whipsawed between levels as low as 1.1520 last Friday and those as high as 1.1692 during the Thursday session.
GBP/EUR rallied from its lows around 1.1520 to close for the weekend near to 1.16 after appearing to be helped significantly when trading in London wound down and the Dollar retreated from new highs in the wake of a surprise slump in June’s Institute for Supply Management Manufacturing PMI.
“This week's data shed more light on the plight of hard-pressed consumers and did not change our view that a consumer spending recession is in prospect,” says Andrew Goodwin, chief UK economist at Oxford Economics.
“There's a quiet week in prospect, with the only major data releases being the remaining S&P Global/CIPS surveys for June. Growth in services activity slowed sharply in May, and June's flash survey indicated that it remained in that lower gear,” Goodwin also said of the week ahead on Friday.
The Pound to Euro exchange rate’s Thursday and Friday rallies will have wrongfooted a speculative market that has become decidedly bearish during recent weeks, and to the extent that they have chipped away at speculative confidence it wouldn’t be a bad thing for Sterling in the week ahead.
"Not really sure where to go from here to be honest, I think we need to see more price data and hear how [central banks] are likely to react to the softening in activity for the broader picture to become clear," writes an unnamed trader in J.P. Morgan's London FX Desk Daily on Friday.
“We still dislike sterling but positioning metrics (IMM and our franchise) are still extended alongside dwindling conviction in general (not a good mix!). We find ourselves on the sidelines for now,” the trader also wrote.
It could also be relevant this week, however, that Friday’s late in the day rally by Sterling was accompanied by persistent co-movements between the GBP/USD and GBP/CNH pairs during the hours up to and after the London close, which is indicative of a big bid for the Pound coming from Asia.
Above: Interbank reference rates and performances for Pound Sterling following Friday’s London close. Source: Netdania Netstation.
Wherever this persists for more than a moment in GBP/CNH it potentially reflects supervision of the managed-floating Renminbi-Sterling rate by the Peoples’ Bank of China (PBoC); something that Sterling bears would ignore at their own risk.
However, there's also a multitude of apparent local influences at work in GBP/EUR too and chief among these at least appears to be the convergence between economies, inflation rates and central bank policies in the UK and Europe.
“We do not interpret this print as signalling the peak in inflation, and continue to believe that inflation will keep rising and peak in September, supported by seasonal consumer demand,” says Mark Cus Babic, a macro research analyst at Barclays.
“At its annual forum in Sintra, the ECB did not reveal significant new information about its policy path or the strategy for addressing fragmentation. In her opening speech, President Lagarde reiterated that the central bank would hike rates by 25bp in July and by more in September if the inflation outlook persists or deteriorates,” Babic also said on Friday.
Above: Pound to Euro rate shown at hourly intervals alongside inverted, or an upside down, Dollar-Renminbi exchange rate.
While economists are yet to call a top for inflation anywhere, the surprise fall from 3.8% to 3.7% in Europe’s core rate of inflation on Friday leaves UK and European price trends on the same trajectory and the same can increasingly be said for the economies and respective central bank policies too.
“The one economy where growth expectations have already been revised down significantly is the UK,” says Paul Robson, head of G10 FX strategy for Europe at Natwest Markets, while writing in a Friday research briefing.
“BoE Governor Bailey sounded very cautious on the economy at Sintra, noting that the UK was at a turning point and may well be weakening faster than other countries. It seems a widely held market view already, so there is less scope for such comments to shift sentiment on the currency,” Robson adds.
Friday's data showed Europe’s main inflation rate rising from 8.1% to 8.6% last month while the core inflation rate fell from 3.8% to 3.7%, echoing a divergence that was also evident in the last UK figures covering the month of May when core inflation fell from 6.2% to 5.9% even as the main inflation rate rose to 9.1%.
Above: Inflation rates from individual Euro area economies. Source: Eurostat.
“As Christine has said we are going to be affected by the shock that Chrstine described in terms of energy prices in Europe because essentially it’s a common shock,” Bank of England (BoE) Governor Andrew Bailey said in the panel discussion last Thursday.
The inflation numbers did little to dispel the appearance of mounting headwinds to incomes and economies implied by other recent data, or the growing question marks over the outlook for BoE and European Central Bank (ECB) policies.
This may be why Governor Bailey and President Christine Lagarde were both coy last week when asked at the ECB Forum on Central Banking in Sintra, Portugal about the prospect of large interest rate changes like those recently used by the Federal Reserve (Fed) and Bank of Canada (BoC).
“Our view that the ECB will be able to increase the deposit rate only to 50bp by the October meeting hinges on our economic outlook, rather than on the ECB's anti-fragmentation tool,” Barclays’ Babic and colleagues said on Friday.
Above: Pound to Euro exchange rate shown at weekly intervals with selected moving-averages and Fibonacci retracements of March and September 2020 recoveries indicating possible medium-term areas of technical support for Sterling.
Financial markets have recently marked down their expectations for BoE and ECB interest rates but only modestly so and continued to price-in on Friday the risk of significant increases in the months ahead, although market assumptions about interest rates could yet diminish further.
In this context markets will likely pay close attention to European retail sales data for May on Wednesday and to Thursday’s minutes from the June ECB monetary policy meeting, which are the highlights of the European calendar ahead of a public speech from President Lagarde on Friday.
However, along the way BoE Governor Bailey unveils the latest Financial Stability Report on Tuesday while Monetary Policy Committee members Silvana Tenreyro, Catherine Mann are scheduled to speak about monetary policy topics on Tuesday and Wednesday.
The week is otherwise devoid of major appointments for Sterling and could be likely to see the Pound to Euro exchange rate trading between 1.1544 and 1.1695, with momentum ebbing above 1.1657 and the lows of that range more likely to be seen during periods of strength in the U.S. Dollar.
That’s according to the author’s model, which uses currencies’ individual sensitivities to the direction of the Dollar and a process of cross-currency triangulation to estimate where non-Dollar exchange rates would be likely to trade as the Dollar itself rises and falls.