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Pound-to-Euro X-Rate Week Ahead: Rebounds Likely to be Short-Lived

- A rebound might be possible this week, but ultimately strength will have its limits

- Employment and wage data dominates the calendar for the Pound

- Inflation and GDP numbers out of the Eurozone will dominate the Euro's calendar

Pound Sterling analysis

© SlayStorm, Adobe Stock

Since mid-April the Pound-to-Euro exchange rate has been in decline after the highs towards 1.16 were rejected amidst a slew of underwhelming UK data and indications the Bank of England would delay raising interest rates until later in the year.

The result is Pound Sterling and the Euro are back in the midst of a long-term sideways-orientated range, defined by 1.15 at the top, and 1.11 at the bottom.

We would suggest, based on the look-and-feel of the charts that the exchange rate is moving towards the bottom of this longer-term channel, the move defined by an interim shorter-term sloping channel forming from the April highs.

From a technical perspective, we would say therefore the bias for the week ahead would have to be to the downside if pressed for a directional view.

Pound to Euro exchange rate graph

There is a chance of a move towards the top of the downward-sloping channel, shown in the above graphic; we would certainly not discount the possibility of some strength over coming days, particularly given the strong sell-off of late which might be due a correction.

However, the important point to observe is that any strength is liable to be temporary in nature.

A break-out in favour of a stronger Pound Sterling will ultimately be data-dependent and only when markets see unequivocal signs that the British economy is waking from its first-quarter slumber would we be confident enough to say markets might be willing to retest 2018 highs.

Until then, technical considerations will likely be key.

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GBP: What to Watch

Data is back to the forefront for Pound Sterling now that markets are trading the currency on expectations for future interest rate moves at the Bank of England. Indeed, we saw Sterling come under pressure on Thursday May 10 after the Bank chose not to raise interest rates at their May policy event. 

What we do know is that the Bank will only deliver a Sterling-supportive interest rate rise should UK data show signs of a strong recovery from a soft start to the year, and this week's data releases will therefore be key.

Tuesday May 15

Foreign exchange markets will be eyeing labour market statistics for March and April at 09:30 AM B.S.T.

The claimant count for April is forecast to have risen to 7.5K from 11.6K previously, while the unemployment rate is forecast to stay unchanged at 4.2% in March.

The three-month-on-three-month change in employment will be key, but we are yet to see market forecasts for the outcome.

Analysts at Lloyds Bank Commercial Banking are looking for a rise in employment of 150K, saying "the employment gain for the three months to March will provide a measure of the underlying strength of the economy." A rise if 150K "would be a substantive increase for the quarter, consistent with the view that the slowdown in output was most likely temporary."

For Sterling the most important release of the day is however likely to be the wage data - the average earnings index + bonus for March is forecast to have registered growth of 2.6%, down from the previous month's 2.8%.

Should wages beat expectations we would expect Sterling to rally as it suggests there is a real risk of domestically-generated inflationary pressures rising in coming months. Such an observation would likely steer the Bank of England's hand towards delivering an interest rate rise in August.

UK wage and employment dynamics

At 10:00 AM Mark Carney and some of his lieutenants will be under the spotlight when they are questioned by the Treasury Select Committee in Westminster on their current guidance for interest rates and expectations for the UK economy.

Expect some criticism from MPs on the apparent u-turn performed by the Bank of England when they opted to not raise rates in May, despite having dropped some significant hints that such an outcome was likely over preceding months.

The Bank will no doubt point at the data. What could move markets is any strong hint on future rate prospects for the economy, so keep an eye on the newswires.

"The market now assigns a greater-than-even chance that the MPC will be on hold for the rest of the year. We are not so sure, because we look for GDP growth to rebound in coming quarters. We acknowledge the downside risks that Brexit uncertainty imparts to the economic outlook, but we still forecast that the MPC will raise rates 25 bps at the August 2 policy meeting. After that rate hike, we then look for the MPC to remain on hold through the end of the year," say analyst at global investment bank Wells Fargo in their latest assessment on the future of UK interest rates.

 

EUR: What to Watch

Tuesday May 15

German GDP for the first three months of 2018 is out at 07:00 B.S.T. Foreign exchange markets are positioned for a reading of 0.4% growth on a quarterly basis and an annualised rate of 1.7% to come out of the Eurozone's economic powerhouse.

For the Euro, the narrative of fading economic growth rates has become an issue and has been blamed for some of the single-currency's underperformance over recent weeks.

Should German GDP data disappoint we could well see this theme put downside pressure on the currency.

Second-estimate Eurozone GDP data for the first quarter of 2018 is due for release at 10:00, with annualised GDP forecast to read at 2.5%, and quarterly data expected to read at 0.4%. Industrial production for the Eurozone is out at the same time, analysts are expecting a monthly figure of 0.6%, and an annualised figure of 3.7%.

Again, disappointment here would almost certainly weigh on the Euro.

Wednesday, May 16

Eurozone inflation is out, and this could certainly move markets in light of the European Central Bank's stated objective of keeping interest rates as low as possible until such a time as inflation is rising back to their 2.0% target.

Annualised inflation is forecast to read at 1.2%, down from the previous month's 1.4%, while core CPI is forecast to read at 0.7%, unchanged on the previous month.

The Euro exchange rate complex is likely to act negatively should the data disappoint as it suggests the ECB will likely delay tightening monetary policy, something that has already been hinted at by key policy-setters. Much of the Euro's rise through 2017 was based on the expectation that 2018 would see the ECB take notable steps on withdrawing stimulus based on the view inflation was rising to their 2.0% target.

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