GBP/EUR Week Ahead Forecast: Looking for a Firmer Foothold

• GBP/EUR looking for a firner foothold near August lows
• Underpinned by trio of supports from 1.1757 to 1.1703 
• S&P Global PMIs, ECB minutes & Fed policy in focus

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The Pound to Euro exchange rate unravelled to one month lows in turbulent trading for Sterling last week but had recovered its footing near an important layer of support on the charts ahead of the weekend and could now attempt to establish a firmer foothoold above roughly the 1.1757 level in the days ahead.

Sterling came undone against the Euro late last week even after another surge in UK inflation lifted investor expectations for Bank of England (BoE) interest rates sharply and despite official figures suggesting that retail spending remained resilient in the face of elevated inflation last month.

“What's more, retail sales in July probably had not benefited yet from the support to households' incomes towards the end of the month from two government policies,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

“For now, then, we still expect households' real expenditure to hold steady in Q4 and Q1, and a recession to be narrowly avoided. But this assumes generous and swift support from the government; the risks are skewed towards disappointment,” Tombs also said on Friday.

Surging inflation saw financial markets betting that Bank Rate could rise to 3.25% by year-end.although this did no favours for the Pound to Euro rate, which sustained a hat-trick of losses culminating on Friday in a test of an important layer of technical support around 1.1757 on the charts.

Above: Pound to Euro rate shown at daily intervals.  Set your FX rate alert here to ensure you don't miss any major moves.

Friday's losses came as a strengthening Dollar and faltering investor risk appetite weighed heavily on Sterling and other currencies, in the process depriving the Pound of any benefit from a steep climb in UK government bond yields that played out in the background.

This leaves much about the outlook for the Pound to Euro rate to be determined by whether it can maintain Friday’s foothold above 1.1757 in the days ahead, a level that coincides closely with Sterling's 55-day moving-average and the 50% Fibonacci retracement of July's recovery.

“Economic surveys will be the focus of attention next week, with flash PMIs for August probably most prominent. There's little reason to think that the pattern of declines in the PMIs in recent months won't have continued in August,” says Andrew Goodwin, chief UK economist at Oxford Economics.

“Pressure on household and corporate spending power from high and rising inflation has remained intense this month and a steady drumbeat of bad news stories about the economy will have weighed on the sentiment of respondents to the S&P Global/CIPS surveys, potentially feeding through to what, strictly speaking, are supposed to be measure of changes in output,” Goodwin wrote in a Friday research briefing.

The highlight of the week ahead is Tuesday’s S&P Global Flash PMI surveys of the manufacturing and services industries for August, which will help shape the market’s perception of the relative health of the UK and European economies at a time of elevated pessimism about the outlook for both. 

Above: Pound to Euro rate shown at daily intervals with spread or gap between UK and German government bond yields. 

“We see services PMI slipping to 52 in August as input costs continue to hamper activity. Labour shortages, including elevated recruitment difficulties, should also continue to keep output growth tempered, with the weaker demand outlook dampening firms' expectations as well. On manufacturing, we expect the slowdown in the sector to continue,” says Sanjay Raja, an economist at Deutsche Bank, in reference to the UK PMIs.

The Pound could remain under pressure against Euro if Tuesday's surveys tell of a continued deterioration in the economic backdrop during August but may also be likely to benefit if the mood in the market was to be lifted by signs of stabilising sentiment within two of the most significant industries for the UK and European economies.. 

However, Thursday’s minutes from the July European Central Bank meeting will also matter for the Euro while both it and Sterling could be indirectly impacted by Federal Reserve Chairman Jerome Powell’s appearance at the annual Jackson Holed Symposium on Friday through its effect on the Dollar and market appetite for riskier currencies like the Pound.

“The first look at how the business sentiment has evolved in August will be key for sentiment and the continued surge in natural gas prices is likely to show through with further declines below the 50-level threshold. The data is unlikely to alter expectations on ECB rate hike action but could unsettle equity market sentiment,” warns Lee Hardman, a currency analyst at MUFG. 

"The Jackson Hole gathering at the end of next week will likely be used to signal the Fed’s determination and with another jobs report and CPI report before the FOMC meeting in September, the market could soon start to price in more tightening over the remainder of this year," Hardman also said on Friday.