Pound-to-Euro Rate Forecast for the Week Ahead: 'Slap Bang' in the Middle of the Range
- GBP/EUR catches a bid as we move through early part of the week
- The main release for the Pound is manufacturing activity data
- The key release for the Euro is inflation data
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One Pound buys 1.1485 Euros at the start of the new trading week, a good deal more than the preceding week amidst a broad-based selloff in the Euro exchange rate complex arising from fresh market nerves stemming from the developing Italian political story.
The Euro has been sold as markets see Italy heading back to the polls after the country's president effectively blocked the formation of a new government with analysts saying the move will only likely heighten the prospects of the Eurosceptic Leage and Five Start Movement increasing their vote share, and mandate.
The Euro has the potential to rise if economic data improves but given the already soft survey data for the beginning of the second quarter and the poor Q1 results, this is unlikely to happen soon.
However, the Pound is unlikely to gain too much traction owing to UK political concerns surrounding Brexit and this balanced political risk environment appears to be allowing GBP/EUR to trade with a 'side-ways chop' that we mentioned in a piece covering GBP/EUR action ahead of the weekend.
From a technical perspective we observe the pair remains stuck right slap-bang in the middle of a range between 1.1200 and 1.1600, just as it has been since last August and for now we are happy to stand aside and wait for more confirmation.
If anything, we forecast a continuation of the sideways trend, since trends tend to extend until proven to have ended.
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GBP - What to Watch
The main release in the week ahead is probably UK Manufacturing PMI for May, out at 9.30 GMT on Friday, June 01, which is forecast to rise from 53.9 to 54.9.
The manufacturing PMI is an index score generated from survey responses of key business managers in the sector. It is a fairly reliable leading indicator of growth. A higher-than-expected result would probably push the Pound higher versus the Euro, especially if the final Eurozone Manufacturing PMI result, which is out only a half an hour earlier, continues to show a contrasting move down.
The busiest day is probably Thursday, May 31, when the Nationwide House Price Index (HPI) is scheduled for release at 7.00, followed by third-tier releases at 8.30 covering credit and lending, such as Net Lending to Individuals, Consumer Credit and Mortgage Approvals; and also M4 Money Supply (all for April).
Another significant release in the week ahead is Consumer Confidence, which is out at 23.01 on Wednesday. Experts are forecasting a slight recovery in to -8 from -9 previously. The release is often a good barometer of future trends in the economy given the disproportionate importance of consumers in the UK economy.
The British Retail Consortium's (BRC's) Shop Price Index, meanwhile is out at 23.01 on Tuesday evening.
Apart from hard data, there may be a lot of focus on Brexit as the EU summit in June to decide the next stages of the process gets nearer.
"Through the remaining four days Brexit may see a renewed focus ahead of the 28-29 June EU Leaders’ Summit. There have been some reports that talks with Brussels will begin again on Tuesday. Meanwhile, the Tory party has been put on notice for an early June return of the EU Withdrawal Bill to the House of Commons after its spell in the Lords," says Victoria Clarke, an analyst at Investec.
EUR - What to Watch
The main release in the week ahead for the Euro is inflation data, out on Thursday at 10.00 GMT, along with unemployment which is out at the same time.
CPI is a critical input in the European Central Bank's (ECB's) decision-making processes and if inflation rises enough the ECB will reduce its emergency QE facility and put up interest rates which will boost the Euro since rising interest rates attract greater inflows of foreign capital, drawn by the promise of higher interest returns.
Current expectations are for inflation to rise in May after April's softer-than-average result due to an Easter effect as well as other temporary factors. Rising oil is expected to push up broad inflation.
Core Inflation is forecast to rise to 1.0% and broad inflation to 1.6% in May.
"After HICP inflation slowed to 1.2% in April, partly on account of Easter affected holiday prices, markets will be eyeing a rebound in May’s figures," says Investec's Clarke.
Any upside in the Euro from higher inflation figures, however, is not expected to endure, according to Nordea Bank's Andreas Steno
Larsen advocates "fading" any increase in ECB hawkishness as it is not expected to last.
"We see elevated risks that markets will put too much emphasis on rising headline inflation in the Euro area over the next months and as the market pricing of the ECB has almost collapsed recently, there is a risk that the market will reprice the ECB hawkishly from the current levels. If a hawkish re-pricing were to arise into the summer, we would prefer to fade such a move," says the Nordea strategist.
The Unemployment rate, meanwhile, is forecast to fall a basis point to 8.4%.
On the Italian front, there is heightened political turmoil after President Mattarella rejected the controversial Finance ministry candidate which the coalition put forward, for his Eurosceptic views.
This has led to a breakdown in the coalition which could be replaced by a technocratic government temporarily whilst elections are reset for October.
So far the impact on the Euro from Italy has been fairly marginal due to minimal contagion to neighbour economies, and this may well persist.
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