Pound to Euro Week Ahead Forecast: Plenty To Chew On

• GBP/EUR weakness to be faded near 1.1665
• Busy UK calendar to keep Pound Sterling busy
• Watch wages, inflation, GDP and retail sales
• Eurozone GDP is key EUR focus

Image © Adobe Images

The Pound to Euro exchange rate remains well supported by an abundance of technical support levels, but it will take a blow-out set of UK economic data releases to deliver fresh 2024 highs in the coming week.

Luckily for Pound Sterling bulls looking for higher levels, there is no shortage of opportunities for UK data to surprise to the upside, with inflation, wages, GDP, and retail sales releases all on the docket.

The figures will offer markets another chance to recalibrate expectations for when the Bank of England will move to cut interest rates, with positive surprises pushing back the expected start time and underpinning the Pound.

Should the data disappoint, we would look for weakness to be relatively shallow owing to the significant technical support levels that reside nearby and would expect weakness to be faded by market participants at around 1.1665:

Above: GBP/EUR at daily intervals. Track GBP and EUR with your own custom rate alerts. Set Up Here

Should data beat expectations, another attempt at the 2023 high at 1.2765 can come into play; note that this forms the 0.85 round figure support in Euro-Pound, which market participants expect to hold.

The significance of this level suggests a big breakout in favour of the Pound might yet be some way off.

Monthly wage data will be released on Tuesday, where a 5.7% 3M/yr reading is expected for December.  Inflation is due Tuesday, and markets expect headline CPI inflation to read at -0.3% m/m and 4.1% y/y in January, with the important core CPI rate at 5.2% y/y. 

UK GDP data for December 2023, Q4 and full-year 2023 are due on 15 February at 07:00 GMT; the market looks for -0.1% m/m, -0.1 q/q and 0.2% y/y for the respective releases.

"The UK economy remains on the very cusp of a recession, with our forecast of a 0.2% fall in December GDP enough to deal the final blow and deliver a mild 0.1% contraction in output in the final three months of the year," says Gabriella Willis, UK economist at Santander CIB. "After the fall in GDP already logged in the three months to September, this would be enough to give the UK the unwelcome 'badge' of recession."

Friday brings retail sales data; one only needs to recall that January's release of December retail numbers provided the biggest surprise for the month, sending the Pound lower.

Above: "PAYE data point to another hefty rise in wages" - Pantheon Macroeconomics.

Another weak outturn could result in a dour end to the walk, although we note that survey data has suggested the economy picked up steam January, which suggests the figures could land on the positive side.

With wage growth continuing to outstrip inflation, the outlook for UK consumers has improved markedly, and this will offer pretty conditions for retailers in the months ahead.

Simon French, Chief Economist and Head of Research at Panmure Gordon, says despite the soft retail data, "the UK’s economic outlook has improved markedly over the last twelve months. Benchmarking its economic momentum against other major European economies, the UK has moved up from 8th of 9 last January, to 3rd of 9 currently."

Above: A lot of bad news is already priced into the UK retail sector heading into Friday's release. Image: ING Bank.

There are two data points of interest in the Eurozone next week, starting with the German ZEW survey for February, where investors will get another gauge of how the region's biggest economy is faring.

The economic sentiment figure is expected to print at 17.5, the current situation at -79.

Watch Eurozone GDP on Wednesday at 10:00 AM to get a sense of how under pressure the economy was in December and the year's final quarter. A -0.3% m/m reading is expected for December and 0% q/q for the final quarter.

We note sentiment towards the Eurozone is already pretty poor, and another set of disappointments will likely be ignored by the Euro.

This leads us to expect the Euro to be more responsive to any better-than-expected outcomes, which could push Pound-Euro below 1.17 (all else equal).