- GBP/EUR supported near 1.1492, 1.1469 & 1.1454
- Meeting resistance near 1.1616 & 1.1645 short-term
- Scope for 1.1476 to 1.1620 range with ECB in focus
- Could lose 1.15 if ECB looks to extend cycle further
The Pound to Euro exchange rate was hobbled last week and could now be set for consolidation in a rough 1.1476 to 1.1620 range in the days ahead with a risk of losses below 1.15 if the European Central Bank (ECB) turns more ‘hawkish’ on Thursday.
Sterling was forced into a widespread retreat last week after UK inflation fell for the first time since April for the month of June, leading financial markets to moderate their implied expectations for how much further the Bank of England (BoE) Bank Rate could yet rise.
“Market expectations (based on overnight index swaps – OIS) for the peak BoE bank rate topped out two weeks ago at 6.5% in March 2024 – some 150bp higher than the current 5% bank rate,” says Holger Schmieding, chief economist at Berenberg.
“Still, there remains the potential for upside surprises in wage data in the near term. As a result, we should brace for the possibility of further swings in OIS markets that may complicate the near-term outlook for BoE policy,” he adds in a Friday research briefing.
Moderating Bank Rate expectations unwound much of the Pound’s June rally last week but with Monday’s release of S&P Global PMI surveys of UK and European manufacturing and services sectors aside, it’s Thursday’s ECB decision that will matter most for how GBP/EUR fares this week.
“The ECB’s determination to continue hiking rates as demonstrated at the June meeting and in the recently published minutes of that meeting is still much stronger than any possible doubts that its own forecasts could (once again) be wrong,” says Carsten Brzeski, global head of macro at ING.
“We expect the ECB to continue with tough talk on Thursday, keeping the door for another rate hike in September wide open. But it will be tough talk without any pre-commitment as in June,” Brzeski writes in a Monday research briefing.
GBP/EUR might benefit this week with a recovery back above 1.16 if Thursday’s statement or press conference commentary suggests the outlook for interest rates is unchanged from June while Sterling could come under pressure if the ECB indicates a willingness to go further.
Governing Council members have emphasised in recent months that interest rate decisions will be determined by economic data emerging between meetings and financial markets have so far taken this to mean borrowing costs will rise in July and September to peak at around 4%.
But Europe’s core inflation rate for June was revised higher from 5.4% to 5.5% last week while this Friday’s German data for July would be awkward for Governing Council members, and potentially the Pound also if there is another increase there.
“At the ECB, there seems to be growing uncertainty about what to do next with even the more hawkish members appearing to be less than fully committed to another hike at the following update in September,” says Rhys Herbert, a senior economist at Lloyds (LON:LLOY) Commercial Banking.
“That seems to partly reflect concerns that the growth outlook might be dimming after recent weaker business surveys. There has also been some progress in reducing inflation, although core inflation remains stickier,” he adds.
Thursday’s ECB decision is the highlight of the week ahead for the Pound to Euro rate, which could be likely to spend much of its time within a rough 1.1476 to 1.1620 range, according to the author’s modeling.