PoundSterlingLIVE -
- GBP/EUR rally stalled & veering into consolidation
- Path higher obstructed at 1.1675, 1.1744 on chart
- Supports underpin at 1.1609 & 1.1612 short-term
- UK CPI a risk but retail sales & EU CPI may offset
The Pound to Euro exchange rate has veered into a consolidation pattern on the charts and could be most likely to trade within a relatively narrow range in the week ahead, one spanning the gap between roughly 1.1609 and 1.1679, though with some risk of a break higher.
Sterling opened as the third worst performing major currency for the week to Monday after falling from fresh one year highs near 1.1750 when declining U.S. inflation rates led many assets to rally through the second half including stocks, commodities and government bonds.
GBP/EUR entered the new week trading back near 1.1650 but could struggle to recover much ahead of Wednesday and the release of a make-or-break set of UK inflation numbers for June owing to uncertainty over the likely outcome and currency market response in different scenarios.
“We think the headline rate of CPI inflation fell to 8.1% in June, from 8.7% in May, below the 8.2% consensus. Motor fuel inflation plunged, while both PPI and BRC Shop Price Index data point to lower food CPI inflation,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
“What’s more, we see a greater risk of an 8.0% print than an upside surprise to our forecast,” he adds.
Wednesday’s data will decide whether the Bank of England (BoE) raises Bank Rate from 5% in August and by how much but with market expectations for borrowing costs later this year already elevated, this week’s data might be more of a downside risk for Sterling than anything else.
UK inflation surprised significantly on the upside of economist expectations in recent months, leading the market to wager on further increases lifting Bank Rate from 5% to 6.25% by early next year, so it might take a significant upside surprise on Wednesday to raise these expectations further.
That sort of a surprise would have grim implications for the economic outlook, however, so it’s far from certain that this kind of outcome would benefit Sterling while elevated market pricing for Bank Rate could be especially susceptible to any undershoot of the consensus on Wednesday.
“GBP surely faces some clearer downside risks than the euro given the greater room for a dovish repricing of Bank of England rate expectations compared to the ECB’s,” writes Francesco Pesole, an FX strategist at ING, in a Friday market commentary.
“The latest wage data pointed at another 50bp hike in August, but next week’s CPI release is still an important risk event,” he adds.
The latest Bank of England forecasts suggested in May that inflation would likely fall to around 7% by July but with economists and market expectations where they are, an outcome of this kind on Wednesday would potentially act as a catalyst for a sell-off in GBP/EUR.
Any such sell-off might be likely to peter out or otherwise lose momentum around the 1.1609 and 1.1612 levels, however, where Sterling’s 50-day moving average and the initial Fibonacci retracement of this year’s uptrend would potentially offer some technical support to the Pound.
But any mid-week losses could be countered if there is any downward revision to the Eurostat estimate of continental inflation for June on Thursday of if UK retail sales figures out on Friday suggest further real or inflation-adjusted growth in spending for the same month.
“Retail sales have recently displayed a surprising degree of resilience, and we think growth probably continued in June, aided by the return to a normal complement of working days after May's extra public holiday,” says Andrew Goodwin, chief UK economist at Oxford Economics.
“Retailers' performance should have been aided by evidence of a further rebound in consumer confidence, which reached an 18-month high on the GfK measure, and the unseasonably warm weather. We think retail sales volumes rose 0.2% m/m in June,” he adds in a Friday research briefing.
An original version of this article can be viewed at Pound Sterling Live