GBP/EUR Rate Week Ahead Forecast: Catching Breath as UK Data Eyed
- GBP/EUR potentially in line for period of consolidation
- Prospect of technical support around 200-day average
- Momentum could ebb on any further rally beyond 1.15
- Job & wage figures in focus ahead of BoE testimonies
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The Pound to Euro exchange rate reached new highs for the year last week but could be set for some consolidation between those earlier peaks and somewhere just above the round number of 1.14 over the coming days.
Sterling came close to €1.1550 shortly after the Bank of England (BoE) announced some of the largest upgrades to its forecasts for the UK economy for more than two decades last Thursday but was quick to relinquish its gains thereafter.
Rising unemployment claims in the U.S. and Office for National Statistics figures revealing a softening of the UK economy for the month of March were prominent among factors appearing to take the wind from the sails of the Pound to leave it little changed against the Euro for the week overall.
"The price action over the past week has been supportive of our view, though it has also highlighted that a key risk to the trade is a broader decline in risk sentiment," says Michael Cahill, a G10 FX strategist at Goldman Sachs.
"Most importantly, the BoE’s policy stance is no longer an outlier in the G10, shifting the previously negative impulse on the currency to a positive one. We recommend investors stay long GBP vs EUR," Cahill and colleagues write in Friday market commentary.
The Goldman Sachs team tipped Sterling as a buy earlier this month and is looking for its late April rally against the Euro to extend to 1.1627 in the weeks or months ahead, a level that matches the bank's three-month forecast for the pair.
However, whether there is an opportunity for the Pound to Euro rate's rebound to extend this week is likely to depend in no small part on what Tuesday's employment figures imply about the outlook for the economy and Bank of England interest rate policy.
"On our measure, however, after yesterday’s hike, the UK has by far the tightest policy in G10, with rates some 3.5% above neutral," says Adam Cole, chief FX strategist at RBC Capital Markets.
"Picking the point at which higher rates turn from FX-positive to FX-negative (through declining growth expectations) is difficult. But within G10 we see the UK being closer to that point than either NZ or the US," Cole writes in a Friday research briefing.
Tuesday's employment figures are important in no small part because the BoE said the "tightness of labour market conditions and the behaviour of wage growth and services price inflation," would be key to its future monetary policy decisions after lifting Bank Rate to 4.5% last Thursday.
Above: Quantitative model estimates of ranges for selected pairs this week. Source Pound Sterling Live.
"Business surveys are consistent with broadly flat employee numbers, but data up to February show that self-employment has picked up," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
"We have pencilled- in a 0.4% month-to-month rise in whole-economy AWE [average weekly earnings] excluding bonuses in March, which would lift the headline rate of year-over-year growth to 6.7%, from 6.6% in February," he adds.
The economist consensus suggests new welfare claims ticked higher from 28.2k to 31.2k in April and that average weekly earnings of employees rose from 6.6% to 6.8% once bonuses are excluded from the measurement.
That could be perceived by the BoE as a source of "inflation persistence" and something that might merit further increases in Bank Rate, and members of the Monetary Policy Committee will have an opportunity to confirm as much when appearing before parliament's Treasury Select Committee this Thursday.
"Based on our forecasts and the MPC's updated projections, we continue to expect a final 25bp hike at the June meeting, based on risk management considerations, leaving terminal Bank Rate at 4.75% for this cycle," writes Abbas Khan, an economist at Barclays, in a Friday research briefing.
