The pause in the longer-term downtrend in the GBP/EUR exchange rate is anticipated to extend a little further.
- Pound to euro exchange rate today: 1.1711
- Euro to Pound Sterling rate today: 0.8540
The first UK hard eco data from the post-Brexit referendum era have proven to be not as bad as many analysts had anticipated, ensuring a short-covering relief rally by Pound Sterling has taken shape over the past two weeks.
The GBP/EUR pair hit a best rate of 1.1783 during trading in the previous week - a notable advance on the 1.1457 low seen on the 16th of August.
The question of course, as we look to the start of September, is whether the market can extend its recent strength or capitulate and ultimately revert to the notable downward forces, in place since June.
"We keep a cautious bias on sterling longer term," says Piet Lammens, an analyst with KBC Markets in Brussels. "Short term, the decline of sterling is taking a breather. Even if a further technical rebound is possible short term."
Indeed, the pair is now in a more established short-term up-trend, marked by a rising succession of peaks and troughs on the four hour timeframe chart.
Our technical studies therefore advocate for further advances.
We now see the pair poised to move even higher, with a break above the 1.1783 highs confirming more upside to a target at 1.1845 where the monthly pivot is situated and likely to prove a tough obstacle to further gains.
Monthly pivots are levels of support and resistence where the exchange rate can stall or reverse direction; they are used by professional traders to gauge the trend and launch counter-trend trading positions.
From a data perspective, in the week ahead the GBP/EUR pair, will see significant data from the Eurozone in the shape of August inflation data and out of the UK Manufacturing, and Construction PMIs.
We have noted here that it would not be surprising were the Pound to trade with a heavy bias in the lead up to the economic data releases having noted just how poor the August numbers from this series were.
There is a risk that a dose of pessimism is injected into this market once more.
Thursday the 1st of September brings with it fresh data in the form of Purchasing Manager Indices, and markets will be looking to see whether the trend of better-than-forecast data will continue.
Analysts are expecting a reading of 49 on the Manufacturing PMI.
“The August manufacturing PMI will show whether activity deteriorated further or recovered after the slump in July, which followed the Brexit vote in June. We expect the PMI to rise to 49.0 from July’s 48.2, which was the lowest since the financial crisis in early 2009," says analyst Bo Jacobsen at Nordea Bank.
On Friday Construction PMI data are released with markets looking for further contraction in the sector with a reading of 46.1 expected.
Will the Euro be Supported by ECB Inaction?
Overall, the Euro appears to have limited downside due to a combination of potentially lower global risk appetite from falling commodity prices, a large current account surplus and an ECB that looks increasingly reluctant to ease policy further.
The big event for the Euro in September will be the European Central Bank's policy meeting.
Many analysts see the September 8th meeting at one in which some fresh policy changes could be announced.
If further rate cuts, or increases to the asset purchase programme were announced, we would expect the Euro to potentially struggle this month.
However, analysts at Credit Agricole suggest the ECB has reason to stand back and keep policy unchanged - a potential positive for the unit:
“The EUR has been well supported of late. This appears to be on the back of stable ECB rate expectations and reduced sensitivity to risk sentiment.
"Regardless of inflation expectations as measured by 5Y inflation swaps being close to historic lows, we see limited scope for the ECB to consider a more dovish monetary policy stance any time soon. This is especially true when it comes to interest rates.”
With the ECB staying on the sidelines, and the Bank of England likely to cut rates again in November, we could well see further downside pressures on the GBP into EUR exchange rate emerge over coming weeks after the current relief trend fades.