GBP/EUR Rate's Friday Close Will be Important

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Pound Sterling has mounted an impressive recovery against the Euro this week, but it must close the day near or above current levels to solidify the near-term outlook.

The Pound to Euro exchange rate is now at 1.1650, which forms the lower end of the 2024 range. Two things can happen:

1) it can defend the line, which will allow it to reestablish in the levels between 1.1650 and 1.1720.
2) It fades below 1.1650, turning this level into a resistance layer, ultimately trapping it in a new, lower range.

Above: GBP/EUR at daily intervals with the 200-day moving average and horizontal support line annotated. Track GBP/EUR with your own custom rate alerts. Set Up Here

We note the exchange rate has recovered above the 200-day moving average following a brief dip below it last Friday which was a warning signal of building selling pressure and the commencement of a downtrend. This was a false break, which will underscore Sterling resilience against the Euro going forward.

The recovery suggests the Pound is strong enough to resist a downtrend against the Euro, but we could still be in for a period of sub-1.1650 levels in the coming days and weeks, depending on how today's price action plays out.

A weekly close above 1.1650 would see us increasingly confident early May will bring with it a potential test of the 1.17 level or even the upper resistance area at 1.1620.

For now, we expect gains to be limited as markets await the central bank's direction. The European Central Bank has indicated it will cut interest rates in June, but the Euro would come under pressure if this was followed by another cut in July, which appears to be an active debate at present.

"We remain comfortable with our forecast that the pound is likely to strengthen somewhat against the euro in the coming months, especially as the ECB is likely to start cutting rates sooner," says a note from Commerzbank.

The Bank of England has become more unpredictable in its thinking owing to a series of speeches from members of the Bank's Monetary Policy Committee that made it clear there is a great deal of divergence in views as to when it would be appropriate to cut rates.

This could make for a more volatile trading environment in the coming weeks.

"From our FX strategy perspective, we suspect there is enough balance and uncertainty on the MPC to suggest the market’s pricing of 55bp of BoE rate cuts by year-end, with the first 25bp fully priced for the 1 Aug MPC, is just about as dovish as it should really be," says Shahab Jalinoos, FX strategist at UBS.

UK inflation will print below 2.0% in April, in an apparent win for the Bank of England, which would imply ample scope for lower interest rates. But, this could yet prove a blip as services sector inflation is running hot and will likely mean headline inflation creeps back above the 2.0% target in the coming months.

"Also, the UK government only just enacted a 9.8% minimum wage hike. In this context, we stick to our EURGBP 0.8500 – 0.8700 range view and would look to fade a new attempt to push towards the top of the range, in line with our 0.8500 end-Q2 target," says Jalinoos.

EUR/GBP at 0.85 gives a GBP/EUR conversion of 1.1765.