• GBP/EUR recovery losing momentum; consolidation ahead 
• Setback toward 1.16 possible if UK wages & GDP data soft
• Technical support likely around 1.1648 & 1.1581 short-term

Image © Adobe Images

The Pound to Euro exchange rate entered the new week near mid-June highs just above 1.17 but might most likely consolidate between there and somewhere around the 1.16 level in the days ahead unless Sterling is able to find reasons for excitement in the UK's latest employment and GDP figures. 

Sterling was the second-best performing currency in the G20 grouping for the week to Monday having lost ground to only the Japanese Yen though it failed in two attempts at establishing fresh highs against the Euro but must now navigate a number of domestic economic data risks in the days ahead. 

These include the latest employment and wage growth figures from the UK on Tuesday and GDP data on Thursday that is expected to cast the economy has given slipped into a second-quarter contraction during May with a -0.3% contraction more than offsetting the 0.2% expansion seen in April. 

"While the slowdown won’t be severe enough to stop the MPC in its tracks, it should lay the foundations for the Committee to end its rate hiking cycle in November," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

"The workforce, meanwhile, probably continued to rebound in May, supported by ongoing momentum in immigration and a further decline in inactivity, as high inflation forces more people to look for work," he adds in a Monday research briefing. 

Above: Pound to Euro rate shown at daily intervals with selected moving averages indicating possible areas of technical support for Sterling. 

The wage component of Tuesday's employment report will be of most interest to the Pound after rising to a new record of 7.2% when April numbers were released last month.

Economist surveys suggest the average wage packet grew 7.1% in the year to the end of May but with prior month's near 10% increase in the minimum wage now fading into the background, risks to the consensus expectation and Pound Sterling might are potentially on the downside, if anything. 

"The labour market stats tomorrow (including the crucial wages number) will be important given recent big Gilt moves," says Sanjay Raja, an economist at Deutsche Bank.

"It will be a messy GDP reading next week, with May data hampered by the effects of the King's coronation. GDP will very likely shrink in May. The question is how much given the various idiosyncratic factors weighing on activity recently," he adds. 

The employment and GDP figures are interspersed with the release of the BoE's latest financial stability report and press conference on Wednesday, which could garner more attention than usual in light of the recent highly aggressive increase in market-implied expectations for Bank Rate. 

Above: Pound to Euro rate shown at weekly intervals with selected moving averages indicating possible areas of technical support for Sterling. 

Analysts, economists, and financial markets have raised forecasts and expectations for Bank Rate significantly since the release of wage data for April and inflation figures for May last month with implied measures suggesting investors now see Bank Rate being raised to 6.5% by year-end or soon after. 

Inflation has not fallen back in the UK to the same extent as it has in Europe and other advanced economies this year after remaining unchanged at 8.7% in May despite the Bank of England having lifted Bank Rate from 0.1% to 5% since December 2021 as part of its effort to return inflation to the 2% target. 

This and recent wage growth rates have led the markets to fear a further protracted period of elevated inflation and to expect further significant action from the Bank of England, though Governor Andrew Bailey hinted at a late June European Central Bank (ECB) conference that additional increases in Bank Rate should not be taken for granted. 

"Markets are pricing in 44bp for August and 145bp in total, which leaves ample room for a dovish repricing to hit sterling should data surprise on the downside," says Francesco Pesole, a senior FX strategist at ING. 

"EUR/GBP is trading around recent lows and may be facing some upside risks to 0.8600+ this week [GBP/EUR: 1.1627]," he adds in a Monday research briefing.