Pound Offers An Attractive Buying Opportunity says Barclays

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Pound Sterling is tipped as a buy against the Euro amongst strategists at Barclays, who judge recent losses have created an attractive entry opportunity, and some fundamentals favour a continued recovery.

“Last week's market correction has likely already washed out (modest) GBP long positioning and is now offering better levels to re-engage in longs (particularly versus the EUR). We hence recommend going short EURGBP (ref: 0.855, target 0.83, stop-loss: 0.87),” Barclays strategists said in a Monday note to clients.

“Demand resilience has been in evidence across most recent data releases, supporting the MPC's intention to proceed gradually and cautiously with rate cuts. In addition, prospects for supply-side improvements due to a closer EU-UK relationship continue to dictate a constructive view on the pound directionally,” they added.

The recommended entry at 0.8550 in EUR/GBP corresponds to Monday’s opening level of 1.1695 while the stop-loss is set at 1.1494 and the target implies scope for a recovery to 1.2048.

Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of November uptrend and selected moving averages indicating prospective areas of support.

GBP/EUR slumped in early August after the Bank of England cut its interest rate and as adverse international fundamentals weighed heavily on Sterling including some US data indicating a loss of momentum in the economy and escalating conflict risk in the Middle East, which exacerbated a rally in low-yielding funding currencies and further undermined their high beta and high yield counterparts.

The pair has since stabilised but will be highly sensitive to the pending deluge of important UK economic figures including Tuesday’s employment data for June and July, which showed the labour market continuing to cool in June with average earnings growth falling to its lowest level since January 2022. 

Other data of note in the week ahead include Wednesday’s inflation report for July, Thursday’s release of GDP data for the second quarter and Friday’s publication of retail sales figures for July.

The most favourable combination of outcomes for Sterling would include a renewed decline for UK inflation including the services component, and a further extension of the first quarter’s dead cat bounce in GDP. However, consensus suggests inflation crept back up to 2.3% in July, from the 2% target previously, owing to statistical base effects. Meanwhile, GDP is seen rising 0.1% for June and 0.6% for Q2.

Above: Pound to Euro rate shown at daily intervals alongside Japan’s NIKKEI 225 index.