GBP/EUR Week Ahead Forecast: Approach of 1.15 if BoE Raises Again
- GBP/EUR looking for foothold on key average at 1.1397
- Scope for another attempt on 1.15 if BoE lifts Bank Rate
- BoE decision a close call but Feb CPI may be influential
- Credit Suisse's takeover & central bank actions in focus
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The Pound to Euro exchange rate reached three-month highs last week but could attempt to better those levels in the days ahead if the Bank of England (BoE) surprises with another increase in Bank Rate this Thursday.
Last week's bonfire of European banking stocks and losses for continental currencies have helped the Pound to reach some of its best levels against the Euro since December but there is a danger of this effect going into reverse for a time from the opening of the new week.
This is after central banks including the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, and Swiss National Bank announced "coordinated action" to boost the availability of U.S. Dollars in the global financial system from Sunday.
Added liquidity and easier funding conditions are potentially supportive of a Monday recovery in risk appetite if the state-brokered takeover of Credit Suisse by UBS on Sunday is well received by financial markets that had shunned risky assets while giving banking stocks the widest possible berth last week.
"We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability. We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation. The UK banking system is well capitalised and funded, and remains safe and sound," the Bank of England said in a Sunday statement.
Sterling has mostly risen against the Euro since the failures of Silicon Valley Bank and others drove financial markets into a panic about stability among small and medium sized banks more generally earlier in March so the Pound might be unlikely to benefit much if global markets stabilise this week.
But GBP/EUR will almost certaintly be responsive to February inflation figures out on Wednesday and their possible implications for the Bank of England decision on Thursday, which is widely seen as a close call between an unchanged Bank Rate of 4% and another increase to 4.25%.
"The Bank of England has consistently delivered a dovish message to markets over the last year, and this hardly seems like the environment to break that streak," says Michael Cahill, a G10 FX strategist at Goldman Sachs.
"For that reason, we think it is too early to be long GBP even if it is no longer the best short," Cahill and colleagues write in a Friday market commentary.
Consensus suggests inflation fell from 10.1% to 9.9% last month while economists look on average to see Bank Rate lifted to 4.25% on Thursday.
Any easing of inflation on Wednesday would be a fourth successive decline that could do little to push the BoE in one direction or the other this week.
Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)
"Focusing on the data, speaking in favour of an additional 25bp hike in March 23 are elevated spot inflation and the rebound of high-frequency activity data. However, wage and inflation expectation data point in the opposite direction," says Abbas Khan, an economist at Barclays.
"We conclude that the BoE will pause next week and will reassess the need for further hikes at the May meeting, when a new Monetary Policy Report will also be published. By then, more data and clarity on the direction of the stress in financial markets will be available," he adds.
The BoE gave almost no guidance on the outlook for interest rates last month and since then few Monetary Policy Committee members have said anything to suggest they are likely to vote for another increase this week.
But while recently softer inflation and wage figures have led some economists to look for an unchanged Bank Rate this week, there is also still potentially much to be determined by what the BoE makes of last week's budget.
This led the Debt Management Office (DMO) to estimate a public borrowing need of £241.1BN in total for the 2023-24 year, which is higher than the £234.1 billion estimated for 2022/23 following the September 2022 'mini budget.'