Pound Sterling's Resilience against Euro and Dollar Faces Big Mid-month Test

Image © Adobe Images

Next week is busy for the British Pound with the release of wage, inflation, GDP and retail sales data set to test the UK currency's ongoing resilience.

"The mid-month data dump lands next week, providing further keys for the avidly data-dependent Bank of England," says Tim Riddell, a strategist at Westpac.

Pound Sterling was heavily sold against the Euro, Dollar and other currencies at the start of this week, but we said at the time that this was likely technical and flow-related and that fundamentals should underpin the currency.

This was proven correct as the main GBP exchange rates recovered throughout the course of the week.

"GBP has clawed back into a perceived 1.26-1.30 range but remains vulnerable to the market's interpretation of next week’s data and the shifting bias of comments from MPC members," says Riddell.

Next week sees the release of wage data on Tuesday and inflation numbers on Wednesday. Pantheon Macroeconomics - one of the UK's most accurate forecasters - says UK inflation will likely print at 4.1% year-on-year in January, up from December's 4.0%.

UK GDP data for December 2023, Q4 and full-year 2023 are due on 15 February at 07:00 GMT.

According to economists at Santander, the economy is likely to have registered a -0.2% quarter-on-quarter change for the year's final quarter.

"The UK economy remains on the very cusp of a recession, with our forecast of a 0.2% fall in December GDP enough to deal the final blow and deliver a mild 0.1% contraction in output in the final three months of the year," says Gabriella Willis, UK economist at Santander CIB. "After the fall in GDP already logged in the three months to September, this would be enough to give the UK the unwelcome 'badge' of recession."

Above: GBP/EUR at daily intervals. Track GBP and EUR with your own custom rate alerts. Set Up Here

Friday brings retail sales data; one only needs to recall that January's release of December retail numbers provided the biggest surprise for the month, sending the Pound lower.

All are key indicators for the Bank of England, which will look for persistent undershoots in UK data relative to expectations before considering cutting interest rates.

Any upside surprises in the data are likely to keep Pound Sterling supported as markets accept the Bank's message that it will be patient before considering rate hikes, and we could yet see further closes above 1.17 in Pound-Euro and an attempt to hold levels above 1.26 in Pound-Dollar.

But it feels like the risks are non-binary, with data disappointments likely to result in bigger falls than the gains resulting from upside surprises.

The Pound to Euro exchange rate struggles to mount any sustained advance beyond 1.17 (see above chart); the resistance only grows in the approach to 1.1765, (which is the big round number of 0.85 in the Euro-Pound).

A pullback into the multi-month range below 1.17 looks to be the market's path of least resistance.

Above: GBP/USD at daily intervals.

Regarding the Pound-Dollar exchange rate, the Dollar is 2024's outperformer thanks to plentiful data releases that point to enduring U.S. economic exceptionalism.

The Dollar is well supported and near-term trend dynamics favour ongoing upside, which puts Pound-Dollar on alert for a test of 1.25.

Yet the Pound is still 2024's second-best performing major currency as the market has conceded that it might have to wait until June when the Bank of England cuts interest rates unless next week's data disappoints significantly.

So, while there is a downside bias heading into next week, any weakness can remain limited.