- GBP/EUR supported near 1.1544 and blocked near 1.17
- GBP/EUR may struggle for momentum above 1.1657
- Limited differentiation GBP & EUR range trading indices
- With the economies of the UK and Europe; The BoE and the ECB are converging
- ECB Minutes, BoE speech, focus on EU retail sales
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The exchange rate between the pound and the euro has been almost volatile in recent trading, but could likely find itself confined to a range of around 1.1544 to 1.1695 over the coming week, as the the pound sterling and the euro increasingly lack differentiation from each other.
The British pound entered the new week near 1.16 and was little changed from its previous open level against the single European currency after choppy trading in which it oscillated between levels as low as 1.1520 last Friday and levels as high as 1.1692 in Thursday’s session.
GBP/EUR rallied from lows around 1.1520 to close the weekend near 1.16 after appearing to be given a significant boost when trading in London stalled and the dollar weakened. is pulled off new highs following a surprise drop in June at the Institute for Supply Management Manufacturing PMI.
“This week’s data shed light on the plight of struggling consumers and did not change our view on the prospect of a recession in consumer spending,” said UK chief economist Andrew Goodwin. United at Oxford Economics.
“There is a quiet week ahead, with the only significant data being the latest S&P Global/CIPS surveys for June. Growth in services activity slowed sharply in May and the June flash survey indicated it remained at that lower speed,” Goodwin also said of the week ahead on Friday.
Above: British pound to euro exchange rate displayed at hourly intervals and annotated for recent events. Click on the image for a closer inspection.
The rises in the exchange rate between the pound and the euro on Thursday and Friday will have offended a speculative market that has turned decidedly bearish in recent weeks, and to the extent that they have shaken speculative confidence, that wouldn’t be a bad thing for the pound in the week. ahead.
“I don’t really know where to go from here to be honest, I think we need to see more price data and find out how [central banks] are likely to react to the slowdown in activity so that the bigger picture becomes clear,” an anonymous trader wrote in JP Morgan’s London FX Desk Daily on Friday.
“We still don’t like the pound, but the positioning metrics (IMM and our franchise) are still extended alongside a drop in conviction in general (not a good mix!). We find ourselves on the sidelines for l ‘instant,’ the trader also wrote.
It could also be relevant this week, however, that the British pound’s late-day rally on Friday was accompanied by persistent co-movements between the GBP/USD and GBP/CNH pairs during the hours leading up to and following the close of trading. London, which is indicative. of a big offer for the pound from Asia.
Above: Interbank benchmark rates and sterling performance after the London close on Friday. Source: Netdania Netstation.
Wherever this persists for more than a moment in GBP/CNH, it potentially reflects monitoring of the Renminbi-Sterling managed floating rate by the People’s Bank of China (PBoC); something Sterling Bears would ignore at their peril.
However, there are also a host of apparent local influences at work in the GBP/EUR and chief among them at least seems to be the convergence between economies, inflation rates and central bank policies in the UK and Europe.
“We do not interpret this impression as signaling the peak of inflation, and continue to believe that inflation will continue to rise and peak in September, supported by seasonal consumer demand,” said analyst Mark Cus Babic. macro research at Barclays.
“At its annual forum in Sintra, the ECB did not reveal any significant new information on its policy trajectory or on the strategy to combat fragmentation. In her opening speech, President Lagarde reiterated that the central bank would raise rates by 25 basis points in July and more in September if the inflation outlook persists or deteriorates,” Babic also said on Friday.
Above: Pound exchange rate against the euro displayed at hourly intervals with the inverted or upside down exchange rate between the dollar and the renminbi.
While economists have yet to announce a peak for inflation, the surprise drop from 3.8% to 3.7% in the core inflation rate in Europe on Friday leaves price trends in the UK and in Europe on the same trajectory and the same can increasingly be said for the respective central bank economies and policies.
“The only economy where growth expectations have already been significantly revised down is the UK,” Paul Robson, head of G10 FX strategy for Europe at Natwest Markets, told a research briefing. Friday.
“BoE Governor Bailey was very cautious on the economy in Sintra, noting that the UK was at a turning point and could well weaken faster than other countries. This already seems to be an opinion widespread in the market, so there is less opportunity for such comments to alter sentiment on the currency,” Robson adds.
Friday’s data showed Europe’s core inflation rate fell from 8.1% to 8.6% last month, while the core inflation rate rose from 3.8% to 3.7%, echoing a divergence that was also evident in the latest UK figures covering May when core inflation fell. from 6.2% to 5.9% even though the main inflation rate was 9.1%.
Above: Inflation rates of the various euro zone economies. Source: Eurostat.
“As Christine said, we are going to be hit by the shock that Chrstine describes in terms of energy prices in Europe, because it is essentially a common shock,” said the governor of the Bank. England (BoE) Andrew Bailey during the roundtable last Thursday.
The inflation numbers have done little to dispel the growing headwinds on incomes and savings suggested by other recent data, or the growing question marks over the outlook for fiscal policies. the BoE and the European Central Bank (ECB).
Perhaps that’s why Governor Bailey and Chair Christine Lagarde were both coy last week when asked at the ECB’s central banking forum in Sintra, Portugal, about the prospect significant changes in interest rates such as those recently used by the Federal Reserve (Fed) and the Bank of Canada (BoC).
“Our view that the ECB will only be able to raise the deposit rate to 50 basis points by the October meeting hinges on our economic outlook, rather than the ECB’s anti-fragmentation tool” , Babic and his colleagues at Barclays said on Friday.
Above: Pound exchange rate against the Euro shown at weekly intervals with a selection of moving averages and Fibonacci retracements from the March and September 2020 rallies indicating possible areas of medium-term technical support for the pound.
Financial markets recently lowered their expectations for BoE and ECB interest rates, but only modestly, and continued to price in Friday the risk of significant hikes in the coming months, even whether market assumptions about interest rates could decline further.
Against this backdrop, markets are likely to pay particular attention to European retail sales data for May on Wednesday and Thursday’s minutes from the ECB’s June monetary policy meeting, which are the highlights of the European calendar ahead of President Lagarde’s public speech on Friday.
However, along the way, BoE Governor Bailey unveils the latest Financial Stability Report on Tuesday while Monetary Policy Committee members Silvana Tenreyro and Catherine Mann are due to speak on monetary policy topics on Tuesday and Wednesday.
The week is otherwise devoid of major rallies for the pound and could likely see the exchange rate between the pound and the euro trading between 1.1544 and 1.1695, with momentum descending above 1.1657 and lows in this range more likely to be seen during periods of strength in the US Dollar.
This is according to the author’s model, which uses individual currencies’ sensitivities to the direction of the dollar and a process of cross-currency triangulation to estimate where non-dollar exchange rates would be likely to trade when the dollar is against it. -even goes up and down.