Pound to Euro: Sterling Looks to Major UK Data Releases to Trigger Breakout

February 12, 2024 - Written by John Cameron

STORY LINK Pound to Euro: Sterling Looks to Major UK Data Releases to Trigger Breakout

The Pound to Euro (GBP/EUR) exchange rate has continued to find support close to 1.1700 and settled around 1.1715 on Monday as tight ranges have prevailed.

UK data this week will have an important market impact and volatility will inevitably increase with the possibility of a breakout.

MUFG still forecasts that GBP/EUR can strengthen to 1.2085 over the medium term amid a hawkish Bank of England (BoE) policy stance in comparison with the ECB.

On the BoE, MUFG commented; “The BoE is not yet confident that measures of underlying inflation will continue to slow. The recent pick-up in business confidence in the UK also signals that cyclical momentum appears to be improving at the start of this year.”

It added; “We are maintaining a short EUR/GBP trade idea to benefit from the BoE’s relatively hawkish policy stance.”

Nomura added; “Overall, we remain relatively positive on GBP among the G10 currencies.”

Latest COT data released by the CFTC recorded a further small increase in long, non-commercial Pound positions to 34,500 from 34,200 the previous week and the largest long position since September 2023.

In contrast, there was a further decline in long Euro positions to 62,200 contracts from 88,80 previously and the smallest long position since October 2022.

The overall positioning will lessen the risk of a further reduction in long Euro positions and will also tend to make it more difficult for the Pound to make headway without positive data surprises.

Crucial UK data will, therefore, be watched very closely this week.

Labour-market data is due for release on Tuesday with wages data the principal focus.

Consensus forecasts are for headline annual wages growth to slow sharply to 5.6% from 6.5% previously with the underlying increase retreating to 6.0% from 6.6%.

Weaker than expected data would trigger a fresh clamour for a cut in interest rates while stronger than expected data would reinforce Bank of England determination to maintain a tight policy.

The monthly consumer prices data is due on Wednesday with the headline inflation expected to edge higher 4.1% from 4.0% with the underlying rate marginally higher at 5.2% from 5.1%.

According to ING; “Our economics team sees both wage growth and services inflation remaining sticky in the first quarter, meaning that the Bank of England will have no rush to turn to a more dovish communication in the near future. Markets are expecting the BoE to move with a delay (in August) compared to the ECB’s and Fed’s easing cycles. We agree, but also see 100bp (vs 80bp priced in) of cuts by year-end.”

ING added; “Some GBP weakness against the EUR down the road is therefore our base case, but the short-term outlook remains quite constructive for sterling.”

Euro-Zone inflation and ECB policy expectations will also be a key element for currency markets.

At this stage, markets are pricing in over a 60% chance of an April rate cut.

ING commented; “Despite some voiced unhappiness from doves like Panetta, consensus among policymakers appears to be favouring holding rates should at least until April’s European wage statistics.”

This would point to June being the timetable for a first rate cut.

Nordea notes that inflation data is not signalling an all clear; “Some surveys are actually pointing to a renewed increase in price pressures. The output price index of the composite PMI index has risen for three straight months already. In turn, the net share of service sector companies expecting to see higher prices over the next three months has been climbing for four months already.”

The bank added; “If the ECB waits for labour market data to confirm weakened inflation dynamics, it is almost bound to be late in starting to reduce rates. However, for now that seems to be an acceptable price to pay for the central bank.”

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TAGS: Pound Euro Forecasts