Pound Edges Higher Against Euro Ahead of Decision Day at BoE

The British pound looks ominously confident against the euro ahead of the landmark Bank of England event on Thursday the 6th.

The pound to euro conversion trades a region between 1.42 and 1.43 with investors unwilling to push the currency pair too far. Why would they with the crunch Bank of England Inflation Report and interest rate decision looming?

The Bank of England’s combined interest rate rate decision and Quarterly Inflation Report is delivered on Thursday and until then we forecast any major moves in this exchange rate to ultimately revert back towards the 1.42 zone.

The bias is decidedly with the GBP/EUR breaking above 1.43 on Wednesday confirming that the most likely break of the afformentioned range will be to the topside.

“The key event for EURGBP is Thursday’s BoE event. A hawkish set of communications could push EURGBP through the July low of 0.6936,” says Greg Anderson at BMO Capital.

Turning the equation around, 0.6936 = 1.4417, representing the year's best for th pound to euro conversion. "We believe there's a potential for big gains in the currency this week," adds Kathy Lien at BK Asset Management.

1.44 will form a formidable layer of resistance though and the market will require an unambiguously positive message from Governor Carney and his team. 

At the time of writing GBP/EUR is quoted at 1.4226, this is essentially unchanged on Monday's close confirming risk-taking will be light ahead of Thursday.

That said the release of a surprising Services PMI figure on Wednesday could cause some volatility. We don't expect any major move though.

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Pound to Outperform, Alongside the US Dollar

Most commentators and analysts are in agreement in their view that the coming week will be an important one for shaping the GBP outlook.

Indeed, the tone for the remainder of the year could be set by what transpires on Thursday.

“It will be the first eventful BoE rate decision for a very long while. Starting with Thursday’s meeting, the BoE will release the Minutes from its monthly MPC meeting alongside the rate decision. Because August is also a Quarterly Inflation Report (QIR) month, the QIR will be released at that same moment as well. The press conference that accompanies QIRs will take place 45 minutes after the policy announcement and QIR release,” says Anderson.

Concerns about weak manufacturing output and GBP strength are likely to surface again, particularly after the release of Monday’s Manufacturing PMI data which showed manufacturers are struggling to find overseas buyers with the pound to euro exchange rate being cited as a key culprit.

The QIR (Quarterly Inflation Report) may show that amidst strong demand-side conditions, the MPC now expects the remaining level of spare capacity to be absorbed a bit sooner than anticipated in May.

We get the sense that markets are positioning for a positive message to come out of the Bank which of course leaves sterling exchange rates exposed to any negative messaging, those watching this pair should be prepared for losses back towards 1.40 in the event of disappointment. 

"With the lower liquidity at this time of year we could see an outsized move driven by the model community immediately after the data release if it is significantly out of line. Otherwise we remain broadly trapped in recent ranges. Our underlying bias is unchanged though, that being the USD and GBP should remain outperformers due to policy divergences," confirm Lloyds Bank in a client note.