GBP/EUR Rate Week Ahead Forecast: Outlook Improving

• GBPEUR outlook boosted by Friday's rally
• Downside rises fading
• Watch UK GDP, Bailey speech this week
• German industrial data, Lagarde speech to impact EUR

Image © Pound Sterling Live

A solid ending to the previous week eases the likelihood of a significant break lower in the Pound to Euro exchange rate over the coming days, which will be dominated by a slew of Eurozone data releases, Bank of England speeches and Friday's release of UK GDP data for the third quarter.

Pound Sterling rallied against the Euro ahead of the weekend, helped by a near-euphoric market reaction to some softer-than-expected U.S. data that lowered the odds of further rate hikes at the Federal Reserve.

This drove down U.S. yields and the cost of borrowing, not just in the U.S. but globally, which helps 'risk on' assets such as the Pound.

Pound-Euro rose above 1.15 and, in doing so, cemented a base at 1.1460 (the exchange rate has not closed below here since May, making it a key level for Sterling to defend if it wants to avoid a more substantial selloff).

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Bill McNamara, a technical analyst and director of The Technical Trader, says the GBPEUR sell-off that began after the August peak at €1.173 has recently lost its momentum.

"Over recent sessions, a degree of support has been developing at 1.1450 or so, and this level appears to be technically significant as it represents a 50% retracement of the rally that began back in February; it was also a resistance area in March and April," says McNamara.

"The bullish divergence on the MACD suggests that a period of stabilisation might now be underway, with limited scope for further near-term weakness," he adds.

The most important data release of the coming week will be that of UK GDP for the third quarter at 07:00 GMT on Friday.

This will be a crucial piece of information for currency markets - that are fixated on growth differentials - to pass judgment on the Pound.

The UK economy grew 0.2% quarter-on-quarter in the second quarter and 0.6% year-on-year. All signs point to a slowdown from these levels.

But ahead of the GDP release, we have the two heavy hitters at the Bank of England in the form of Governor Andrew Bailey and Chief Economist Huw Pill to look forward to.

Pill speaks on Monday at 17:00 and the market will be looking for him to comment on last week's Bank of England policy decision and guidance update. Pill's most recent speech saw him use the Table Mountain analogy to describe the outlook for UK interest rates, signalling they would remain at 5.25% for an extended period.

"Shifting expectations on interest rates might have been expected to drive sterling lower, but the BoE’s shift to its 'Table Mountain' strategy – a period of levelling off before reducing rates – now appears to be in the price," says McNamara.

On Wednesday at 09:30, Bailey will speak at the Central Bank of Ireland's 'Financial System Conference: achieving good outcomes in an uncertain world'. Bailey will provide the keynote address and follow it up with a 'fireside chat' alongside other panellists.

Therefore, he will likely touch on the UK economy and interest rates at some point in his appearance in Dublin.

Following Thursday's interest rate decision, Bailey said in a media interview he would have to "lean against" market developments following the Bank of England's decision made earlier in the day.

Despite the Bank stating rates would remain at current levels for an extended period, rate cut expectations increased, resulting in the first rate cut being fully priced for September 2024.

This development explains why the Pound struggled to advance in the wake of the Bank of England's decision. However, Bailey's subsequent intervention and pushback were explicit and appeared to stabilise Sterling.

We expect both Pill and Bailey to hammer home this message in their upcoming speeches.

If the market buys it, the Pound can remain supported. If not, then further downside pressures are likely.

Image © Adobe Images

The Euro's recent run of strength will be tested this week by some Eurozone data releases and a speech by European Central Bank (ECB) President Christine Lagarde.

First up on Monday at 07:00 GMT is the release of German factory orders, which are expected to have shrunk 1.1% month-on-month in September as the sector's struggles extend.

Sentiment towards the German economy is already poor and well understood by currency markets, meaning any upside surprise would likely have a more significant impact on the Euro. Therefore, we are on the lookout for gains should data beat expectations.

Watch the release of the final Eurozone PMI for October, where any deviation from the initial release could spark a currency reaction (composite expected @ 46.5, services @ 47.8). Again, any upgrade would likely have the most significant market impact.

Tuesday at 07:00 GMT sees German industrial production for September, where a flat 0% is expected. The reaction function would be similar to the previous day's releases.

Wednesday, we will get a chance to see how the Eurozone's consumer is holding out in the face of higher interest rates as retail sales are due for release at 10:00 GMT. A -3.1% reading is expected.

On Thursday ECB President Lagarde speaks at 17:30 GMT, and the Euro will react to any fresh takes she might have on the economy and the outlook for interest rates. We doubt she would deviate away from the message further rate hikes will be forthcoming if the data warrants.

But she must surely acknowledge the progress being made on inflation and ongoing indications that the economy is struggling. If so, the Euro could come under pressure.