GBP/EUR Week Ahead Forecast: Supported Above 1.1620, BoE and ECB Commentary in Focus

• Pound Sterling supported above €1.16
• But capped at 1.1740
• BoE testimony in focus Wednesday
• But ECB speak likely more important
• Lagarde, Lane to speak Monday
• ECB GDP release in focus Thursday

Image © Pound Sterling Live

The Pound to Euro exchange rate (GBPEUR) is forecast to remain supported above 1.16 over the coming days after a late-August pullback failed around 1.1620 and the subsequent rebound opens the door to another test of the 2023 highs.

Price action in GBPEUR remains characteristically choppy, albeit within a relatively well-defined range that allows for a relative degree of confidence in planning upcoming payments.

To the upside, the 1.1772 level is in reach again, although the pair has not closed above 1.1743 in 2023 which serves as a reminder that there is significant resistance in this area that tends to ultimately result in Pound Sterling capitulation and pullbacks in the exchange rate below 1.17. 

To the downside, the daily close above 1.1620 last week, followed by Thursday's strong uptick (+0.37%) to 1.1683, suggests an interim level of support that will be an important marker this week:

Above: GBPEUR at daily intervals showing the 1.1620 support area which was defended last week.

A break below 1.1620 would likely invite a test of lows located near 1.1540, which forms the bottom of the May-September range.

Indeed, this range looks set to hold and suggests weakness will likely be limited towards the lower 1.15 area unless a UK-specific political or economic shock were to evolve over the coming week.

With this in mind, it is worth noting there is very little on the UK economic calendar this week, which suggests limited scope for UK-specific downside.

Of interest will be Wednesday's appearance of the Bank of England's Monetary Policy Committee (MPC) members before Parliament's Treasury Select Committee where they will be grilled on the latest developments concerning UK inflation and interest rates.

"Governor Bailey, Cunliffe, and Dhingra will testify to the Treasury Select Committee following the publication of the Aug MPR. While Dhingra will most likely stick to her dovish comments, it could be interesting to hear from Bailey and Cunliffe. We will in particular look for comments about how continued sharp upside surprises in wage growth might shape policy moving forward," says a note from TD Securities.

In keeping with Bank of England Chief Economist Huw Pill's latest comments, expect MPC members to indicate that inflation remains worryingly elevated to prompt further rate hikes, bolstering market expectations for another 25 basis point hike this September.

But at the same time, MPC members will tell parliamentarians that recent softer inflation data has been encouraging and this should ensure market pricing for a further hike in November remains less certain.

Such outcomes would be consistent with the Pound-Euro exchange rate maintaining values around current levels.

Turning to the Euro, European Central Bank (ECB) Governing Council members are in focus Monday, with ECB President Christine Lagarde the highlight as she is scheduled to deliver comments at 14:30 BST.

Above: ECB's Lagarde is in focus Monday. Image: ECB.

She will be bookended by Elderson and Lane, all of whom should provide the market with guidance as to what the central bank will do when it delivers its September 14 decision.

Last week we received Eurozone inflation data that was, on balance, more robust than the market was expecting, although core inflation did fall back as expected.

ECB members will therefore likely acknowledge the difficulty high inflation still poses to their decision-making, allowing them to lean towards another rate hike in September.

But the Council members will also have to acknowledge that economic data has undershot the ECB's projections as the economy slows faster than was expected, raising the prospect that inflation will fall sharply over the coming months.

Above: Services inflation is a key component of ECB decision making. It is coming down, which is encouraging for the ECB. However, Spain's recent uptick would be of concern given Spain has tended to lead broader inflation dynamics.

This would lean against a September rate hike, raising the uncertainty around the upcoming decision and meaning Euro exchange rates could be highly reactive to both the final decision and the guidance delivered by ECB members in upcoming speeches.

ECB Governing Council members Schnabel and De Guindos will meanwhile speak on Tuesday (13:30 BST and 15:30, respectively), both have delivered speeches in the recent past that have tended to move the Euro and they will therefore be closely monitored by markets.

Thursday sees the release of Eurozone GDP for the second quarter, where an increase of 0.3% q/q is expected to be announced.

An undershoot would reinforce the narrative that the economy is struggling more than the ECB had expected, thereby giving rise to expectations that the central bank would skip a hike in September to allow the impact of previous hikes to work through.

Such an outcome could undermine the Euro and allow GBPEUR to press towards the top of its summer range, although, as mentioned, it might be too soon to expect a meaningful break above 1.1740.