• GBP/EUR close to one-year high after European data deteriorates
• But recession mostly technical so far & ECB implications uncertain  
• UK employment & GDP data in focus ahead of ECB rate decision
• Little scope for data to lift Bank Rate expectations or GBP further
• Risk of corrective setback if ECB undeterred from hawkish stance

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The Pound to Euro exchange rate came close to one-year highs last week but could find itself stalling or even falling if the European Central Bank (ECB) decision helps the single currency to find its feet again on Thursday, or if UK economic data leads the market to fall out of love with Sterling beforehand. 

Sterling edged higher against many counterparts in a buoyant market for risky assets last week but rallied notably against an underperforming single currency in the latter half after Eurostat revisions to earlier announced figures suggested Europe's economy slipped into a technical recession in the first quarter.

The revisions were purely technical, however, while other economic indicators have undermined the idea of there being any recession in Europe so losses for the single currency might ultimately prove to be fleeting and especially if the data does little to impact the ECB's interest rate stance this Thursday.

"Without an Irish accounting quirk and a post-COVID-19 plunge in German government spending, the Eurozone economy would have printed growth of almost 0.4% qoq in Q1, in line with the solid PMI readings in early 2023 and a 0.23% qoq gain in gross value added in Q1," says Holger Schmieding, chief economist at Berenberg.

"The revised GDP data do not change the underlying picture by much. However, the term “recession” and the decline in core inflation from 5.7% yoy in March to 5.3% in May can still impact the ECB debate. They reduce the risk that the ECB may deliver three instead of the two further 25bp rate hikes we expect for June and July," he adds.

Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of February rally indicating possible areas of technical support for Sterling. Click image for closer inspection.

Friday's gains lifted GBP/EUR above major technical resistance at 1.1675 on the charts and to its highest since August last year but the UK's employment and GDP data will be key in determining if it can hold around these levels on Tuesday and Wednesday.

The trouble is that with market expectations for the Bank of England (BoE) Bank Rate having risen so much in recent weeks, the bar is now high for them to rise further, which could make it difficult for the Pound to benefit much even if this week's data continues to suggest a resilient labour market and economy on Tuesday and Wednesday.

"Pay data has remained strong in recent months and we think both main measures are likely to have accelerated further in April because of the near-10% increase in the national minimum wage," says Andrew Goodwin, chief UK economist at Oxford Economics.

"We expect headline total pay growth to rise to 6.1% in April, with regular pay growth accelerating to 7.1%," Goodwin adds.

The market is likely to be most interested in the pace of wage growth in April and the strength of any rebound in the economy from a March contraction stemming from industrial action and moderation on the consumer side. 

Above: Pound to Euro rate shown at weekly intervals with Fibonacci retracements of 2022 fall indicating possible areas of technical resistance for Sterling. Click image for closer inspection.

"We doubt that this week's labour market report will ease the pressure on the MPC to continue to raise Bank Rate at its upcoming meetings," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

"While we expect to see further evidence that labour market slack is accumulating, markets probably will be transfixed by April's wage numbers, which look set to surprise to the upside," Tombs and colleagues write in a Monday research briefing.

While employment and GDP figures are the highlights of the week for Sterling, the Pound to Euro rate is also likely to be sensitive on Thursday to what the European Central Bank says about the outlook for interest rates in light of a recent moderation of inflation and last week's revelation of a recession on the continent. 

The ECB made clear in May that its future policy decisions would reflect the economic data received in the interim and single currency could benefit at the expense of Sterling this week if the bank writes off Europe's recession as a technical affair or otherwise suggests interest rates are likely to continue to rise in the months ahead.  

"Offsetting forces should lead to stagnant growth after a technical recession over the winter, but recent activity and credit data highlight downside risks," says Marc Cus Babic, an economist at Barclays. "We think the ECB will hike by 25bp but remain noncommittal about the future, with no changes to medium-term forecasts." 

Above: Quantitative model estimates of ranges for this week. Source Pound Sterling Live.