GBP/EUR Week Ahead Forecast: UK Data Holds Key to Further Recovery 

• GBP/EUR in longest stretch of gains since September
• But faces multiple technical resistances once past 1.13 
• UK jobs, wage & CPI hold key to an extended rebound

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The Pound to Euro exchange rate has run up its longest back-to-back gains since September in recent trade but would likely have difficulty extending its recovery beyond the nearby 1.13 level if either of the UK's employment or inflation data comes in softer than expected this week.

Pound Sterling edged higher against an underperforming Euro for five days in a row last week in price action that was seemingly aided by an increase in UK government bond yields and remarks from members of the Bank of England (BoE) Monetary Policy Committee (MPC). 

Members amounting to a majority on the nine-seat MPC suggested in public appearances and testimony before parliament that further increases in Bank Rate would be the likely response if wage pressures or other economic factors threaten to keep inflation stronger for longer than is currently expected.

Hence why this Tuesday's averages earnings and employment data will be scrutinised closely by the market and Sterling ahead of this Wednesday's release of inflation figures for the month of January, both of which will determine if the Pound to Euro can overcome nearby technical resistance just above 1.13.

"Whether a weak economy is translating into softer demand for workers, if inactivity shows more signs of falling back, and the extent to which pay growth remains heated will be the main focuses of attention in the latest labour market data. We expect the evidence to be consistent with a still-tight jobs market," says Andrew Goodwin, chief UK economist at Oxford Economics. 

Above: Pound to Euro rate shown at daily intervals with selected moving averages and Fibonacci retracements of December sell-off indicating possible areas of technical resistance for Sterling. Click image for closer inspection. 

Consensus or the average of professional forecaster estimates suggests wages grew at a modestly reduced annualised pace of 6.2% in the three months to the end of December, down from 6.4% previously, while Sterling would potentially benefit from any upside surprise on Tuesday. 

Economists and markets will also be interested to see whether unemployment remained at 3.7% in December or if it continued to edge higher from August's multi-decade low of 3.5%, although the main event and highlight of the week is, without doubt, Wednesday's release of inflation data for January. 

"January’s consumer prices report, due next Wednesday, probably will make MPC members wince, initially. We think the headline inflation rate fell to 10.3%, from 10.5% in December, but overshot the Committee’s 10.1% forecast," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

"In any event, with one more CPI report to come before the MPC’s next meeting, on March 23, January’s data won’t decisively tip the scales towards either another rate hike or a no-change decision," he adds. 

Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live.

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Consensus looks for the UK inflation rate to fall from 10.5% to 10.3% for the month of January but anticipates that this will be accompanied by a lesser decline in the more important rate of core inflation, which overlooks changes in food and energy prices and is expected to ease from 3.6% to 6.2%. 

Any upside surprise from either of these numbers could be enough to see interest rate derivative markets bet more confidently on another increase in Bank Rate being announced following the next meeting of the MPC on March 23, with possibly supportive implications for Sterling. 

To the extent that this week's data either undermine concerns about the condition of the UK economy or otherwise fosters expectations of a higher eventual peak in Bank Rate, it could undermine market appetite for a recently-underperforming Euro and further encourage the recovery in GBP/EUR.

"We do not think EUR-GBP should be trading close to the levels seen when investors had structural concerns about UK assets. Moreover, the UK trade deficit is narrowing faster than the Eurozone's; valuation metrics suggest that GBP remains cheaper than the EUR; and positioning has turned long the EUR but remains short GBP. We think the stage is set for a lower EUR-GBP," says Dominic Bunning, European head of FX research at HSBC. 

"The obvious catalyst for this would be a shift from the ECB. We had a sneak preview of the potential impact of this in January when headlines suggested the ECB might only hike 25bp in March (Bloomberg). Any signs that the ECB is starting to turn less hawkish would be a clear signal for EUR-GBP to move lower from these extended levels, in our view," he adds in recent research. 

Above: Pound to Euro rate shown at weekly intervals with selected moving averages and Fibonacci retracements of 2022 sell-off indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.