- GBP/EUR rebound stalled by technical resistance at 1.1419
- UK economic data, BoE bond intervention aids stabilisation
- Scope for range-bound GBP/EUR consolidation short-term
- BoE speech in focus amid lull in UK, Europe data schedule
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The Pound to Euro exchange rate has rebounded sharply from last week's lows but its prospects for a further recovery are uncertain and it may be the case that the best Sterling can hope for in the days ahead is to meander sideways in a pattern of range-bound consolidation near to technical resistance at 1.1419.
Sterling opened last week with big falls against many currencies but less so against a Euro that also pushed deeper below the parity level against the Dollar and with both currencies now likely to find themselves better supported against the greenback this week, the risk is of a range trade in GBP/EUR.
This is after data later became available late last week to suggest speculative bets against the Renminbi and inadequate Sterling liquidity in Asia trading hours played a role in driving the Pound's losses, although the very same factors at play there are also relevant for the Euro.
There are reasons for believing that the Peoples' Bank of China (PBoC) has been intervening in the currency market in an attempt to stabilise the managed-floating Renminbi complex ahead of the current Golden Week holiday and in the lead up to a key mid-October political event for China.
"The scale of their firepower is credible, as the aggregate net foreign asset position of local banks reported by the PBoC turned notably more positive in 2021," was the written Thursday opinion of Stephen Gallo, European head of FX strategy at BMO Capital Markets.
Above: Pound to Euro exchange rate shown at daily intervals with Fibonacci retracements of August decline indicating likely areas of technical resistance for Sterling. Click image for closer inspection.
The above is important for Sterling, the single currency and many others around the market because to some extent the managed-floating Renminbi has a knack of taking other currencies with it when it changes direction and the author thinks the Renminbi has bottomed out at least for the coming weeks.
However, last Wednesday's Bank of England (BoE) intervention to restore order in a previously crumbling UK government bond market has also been widely cited as a stabilising influence for Sterling over recent days and might remain a supportive factor for the Pound in the week ahead.
"This is not to downplay the important dangers that presented themselves this week that forced the Bank of England to step into markets. Nor is this an attempt to minimize the degree to which assets moved," says John Briggs, global head of economics and markets strategy at Natwest Markets.
"Nor am I minimizing the stress and losses portfolios and others are being forced to deal with. It’s more a reassurance that in our opinion some of the more hysterical headlines and analysis in the space this past week is overdone," Briggs wrote in a Friday round up of Natwest's latest research.
The Sterling-Euro rate's recovery last week was evidently aided by the Office for National Statistics (ONS) on Friday when it announced an upward revision to its estimate of second-quarter GDP growth, meaning the UK economy dodged a technical recession last quarter, and the latest current account deficit numbers.
This week's calendar offers little of note in terms of UK economic data although BoE Monetary Policy Committee member Catherine Mann is set to deliver a speech titled "The path back to 2 percent" at an event hosted by the CD Howe Institute on Monday evening, which will be important for Sterling.
Above: Pound to Euro exchange rate shown at weekly intervals with Fibonacci retracements of September 2020 recovery indicating possible areas of technical support for Sterling. Click image for closer inspection.
"We believe recent official statements imply neither currency intervention nor an inter-meeting rate hike. We continue to think that the bank will hike by 75bp (about half of market expectations) in November," say Fabrice Montagne and Abbas Khan, both economists at Barclays.
"We think the BoE is mindful not to hike too much, which could lead to a substantial credit crunch and real-estate collapse. Smaller hikes than the market expects would leave a lower currency as the path of least resistance," they both wrote in a research briefing last Thursday.
Meanwhile, in Europe the economic calendar is also devoid of major event for the single currency although with the continent's gas supplies having been sabotaged ahead of the winter period, the Euro's metaphorical shirt may be growing almost as dirty as Sterling's.
This is after data released on Friday showed European inflation surprising sharply on the upside of expectations for September when the annual rate of price growth reached 10% and the rate of cire inflation climbed from 4.3% to 4.8%, heaping more pressure on the European Central Bank (ECB).
"Global growth expectations still favor further EUR downside. Coupled with that, the EUR is trading rich to our GMPCA framework, increasing near-term vulnerabilities," says Mark McCormick, head of FX strategy at TD Securities.
"Things can get much worse in the short-term for GBP, reflecting the lost confidence in assets and a weak net international investment position," McCormick said on Friday while suggesting that clients sell EUR/USD and GBP/USD in anticipation of further losses over the next two months.