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GBP/EUR Week Ahead Forecast: Indecisive Market Could Set Sterling Adrift

  • Outlook for GBP/EUR potentially turning more positive
  • As stubborn inflation stokes risk of a higher Bank Rate 
  • But market indecision & tight range possible this week
  • With ECB speeches, S&P Global PMI surveys in focus

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The Pound to Euro exchange rate has rallied enthusiastically from multi-month lows in recent trade and the outlook for it may now be turning for the better, although this week the risk is of an indecisive market setting Sterling adrift within what could amount to a relatively narrow range.

Sterling rose against all counterparts within the G10 and G20 baskets last week amid a possible reappraisal in the market of the outlook for the UK economy including the pace of inflation over the course of this year and the likely response from the Bank of England (BoE). 

With Office for National Statistis (ONS) figures suggesting persistent inflation in the services sector in hand, the Pound traded around 1.1467 at its highest last Thursday and soon after a regional newspaper published details of an interview with BoE Governor Andrew Bailey.

"Yesterday, Bailey admitted that the BoE might have to be more forceful than they imagined in the most British way possible," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

The governor's remarks suggested Monetary Policy Committee members would be prepared to lift Bank Rate in line with current market expectations - which suggest it could peak around 4.5% this year - if economic data emerging from the UK merits such a response. 

Above: Pound to Euro rate shown at daily intervals. Click image for closer inspection. 

While the Pound rallied through much of Thursday it did also eventually retreat from its highs as European bond yields rose in the wake of remarks made by European Central Bank (ECB) President Christine Lagarde.

"I know that a lot of journalists made a big fuss about the fact that headline numbers had gone down most recently and you also mentioned yourself that we have to look at core inflation which is certainly critically important," President Lagarde said in a panel discussion at the World Economic Forum. 

"Inflation by all accounts, however you look at it, is way too high and our determination at the ECB is to bring it back to two percent in a timely manner and taking all the measures that we have to take," she added.

Previously, the Pound to Euro rate had notched up its largest gain of the week following a Tuesday Bloomberg News report suggesting some members of the ECB Governing Council may be rethinking the more hawkish policy stance adopted in December.

All currencies are likely to remain sensitive to any commentary suggesting divergence between the views of central bankers and those of the market when it comes to the outlook for interest rates, and there is a number of ECB Governing Council members who are scheduled to speak publicly this week.

Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

These speeches are concentrated in the opening half of the week alongside the main economic data outputs of the period for the UK and Europe, which include the latest S&P Global PMI surveys of manufacturing and services sectors on both sides of the English Channel. 

"The flash estimate of January’s PMI’s (Tuesday)and Germany’s IFO survey (Wednesday) are the main data highlights," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

"We see the risks tilted towards a stronger PMI reading than the consensus expects because energy prices have continued to pull back," he adds.

With both UK and Europe economies recently hampered by high energy prices and their inflationary side effects, there is uncertainty over whether the Pound or Euro could be expected to benefit more if Tuesday's PMI surveys offer further signs of stabilisation in their respective industries.

This is another reason why the week ahead could see GBP/EUR drifting in a potentially narrow range spanning the gap between roughly 1.1359 and 1.1408 even if the medium-term outlook begins to turn more positive for Sterling. 

Above: Pound to Euro rate shown at weekly intervals. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.