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Read on to take a look at our current outlook for the sterling-euro currency pair.
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GBPEUR finds new support for uptrend?
Once again, GBPEUR came off resistance levels, dropping over the course of Tuesday and Wednesday last week. However, a new support seems to have formed, adding to the notion that we are seeing a GBPEUR uptrend.
This week, there is very little expected to come out from the UK. So far, the UK has escaped any negative banking-turmoil headlines and therefore this has been supportive of GBP.
In the eurozone, inflation numbers for March are due from Germany and the European Union as a whole. Markets are expecting the core inflation number to continue to rise from 5.6% to 5.7%, which should continue to support the ECB’s hawkish stance on hiking interest rates, and therefore be supportive of the EUR.
The higher low from Thursday last week seems to suggest that the GBPEUR pair could well continue the uptrend since the lows experienced in February. The December/ January/ March resistance level still remains a key level to break for GBPEUR to continue its run higher.
GBPEUR resistance coming into play
Fears of the banking crisis spreading to Europe played a big part in GBPEUR hitting January’s resistance levels before we see a sense of calm play back into the markets.
This week the decision by the BoE will be the main focus, with markets expecting that this 0.25% hike could be the last. Core inflation is expected to ease to 5.7%, with PMI figures for March expected to be released later this week.
On Friday, services and manufacturing PMIs are due from the Eurozone. Continued improvement in the economy will continue to add to the ECB’s hawkish narrative, especially following their 0.5% rate hike last week.
GBPEUR fails to find direction
The story of growth in China kept the euro in demand at the start of the week. However, diverging data on growth gave the pound support going into the end of the week, with the GBPEUR pair finishing unchanged.
This week in the UK, focus will fall on the job market and whether the data will highlight any inflationary pressures. Should wages come in higher, then markets will raise the expectations of any interest rate rises by the BoE, encouraged by the recent expected growth figures that came in better than expected.
Next week’s BoE meeting and its following narrative will be very important.
On Thursday, the ECB will take centre stage with a 0.50% rate hike all but guaranteed, alongside key guidance on future rate hikes. Currently, markets see 130bps of additional rate hikes going into July. Given last week’s data that suggested current economic growth may not be as much as initially expected, could the ECB retreat some of their hawkish tone?
The week will finish with the release of the final reading of inflation for February.
February uptrend short lived
There remains a clear divergence on interest rate policies between the BoE (Bank of England) and the ECB (European Central Bank) especially after Governor Bailey cautioned markets against rate moves in either direction. However, some comments from the ECB continue to suggest that they may have to hike rates further.
Renewed risk appetite following better than expected activity in China, which supported the euro.
- The BoE turn hawkish
- Activity in China slows
This week in the UK, focus will be back on growth. In recent weeks there has been growing optimism that the UK is performing better than what was initially expected, with Friday's data expected to give a first taste of economic growth for January. Markets are expecting growth to be at 0%, following a contraction in December.
In Europe, there is very little happening this week that is expected to have any major impact. A final GDP print for Q4 2022 is expected to confirm growth at 1.9%, so any moves to favour the euro will likely stem from increased risk appetite present in the markets.
December downtrend broken, start of uptrend?
Last week, improving data points from the UK saw the downtrend from December break with two key resistance levels breaking.
We seem to be at the start of an uptrend, but that argument will only be supported if we see GBPEUR bounce higher off the rising supporting trend line.
The UK’s improving sentiment appears to be diminishing quickly and the ECB’s (European Central Bank) hawkish narrative begins to take over.
A very quiet week ahead for the UK, with the only highlight being a second estimate on the PMI data from last week, which suggested that the UK may well be avoiding a recession. A revision higher will add to the green shoots of positive sentiment recently seen in the UK.
In Europe, we have the first estimates of inflation for February, with markets expecting the headline print to ease to 8.2% but the core inflation number to remain at 5.3%. The week will end with the final readings of the S&P PMI numbers.
As mentioned, the GBPEUR currency pair will need to rise higher off the rising supporting trend line with a higher low to confirm that this uptrend will have the strength to continue. Perhaps a drop in EU core inflation could be the needed catalyst?
December's downtrend remains intact
Divergent monetary policy
ECB (European Central Bank) members keep their hawkish rhetoric causing the markets to suggest that interest rates will peak at 3.75%. Whilst in the UK, lower inflation and dovish comments from the BoE (Bank of England) suggest that we are close to peak interest rates.
Divergent growth expectations
The UK economy is still touted to be one of the worst performing out of the countries that form the G7 (The International Group of Seven), whilst the European economy continues to show resilience.
In the EU, inflation expectations ease, countering the need for the ECB to continue hiking interest rates and causing interest rate projections to decline.
The growth outlook from the UK exceeds expectations.
On Tuesday, the UK’s release of February’s preliminary PMI data will be the main focus, currently expected to show a continuing decline in activity.
PMIs from Europe are also due to be released this week, expected to gauge whether the rebound in economic activity has continued into February. Inflation figures from Germany, Italy, and the whole EU-bloc followed by Germany’s GDP figures for Q4 will be key for the ECB.
News from Europe will largely dictate moves this week, and should the data support better growth for Europe and support the hawkish ECB, then a move lower on GBPEUR cannot be ruled out.
December's downtrend remains intact... for now?
Last Monday’s price action dominated the flow for last week with lower levels for the pair rejected and the markets testing the upper resistance levels of the downward trend.
However, the week was quiet, and the move higher could just be a consolidation of the recent moves lower for the pair.
Job and inflation data for the UK will be in focus and will largely dictate what kind of rate hike we get from the BoE (Bank of England) in March.
Slower wage growth and lower inflation could well mean that rate hikes of 0.50% are in the past with the Bank opting to slow the pace of the hikes, supporting the Bank’s dovish stance and a potential GBP negative.
This week, economic growth for the EU will be back in focus with another estimate for the fourth quarter. Initial estimates put growth at 1.9% with markets expecting a similar number here. Putting this into context, year on year growth in the fourth quarter for the UK was 0.4% versus Europe’s estimate of 1.9%.
Spanish and French inflation for January is expected to come in at 5.8% and 7% respectively.
Moves on GBPEUR continue to be dictated by the improving growth sentiment of Europe versus the UK, as well as the fact that the ECB (European Central Bank) remains hawkish in comparison to a dovish BoE. Data continuing to support this narrative could see GBPEUR hit the downtrend resistance before we see a continuation of the downtrend.
December downtrend set to continue
Following the ECB (European Central Bank) and BoE (Bank of England) meetings last week, there still appears to be a divergence in future interest rate hikes.
The BoE hinted that they are close to their peak, whereas the ECB confirmed that they will hike by another 0.5% in March with further communication beyond that unclear. However, President Christine Lagarde did reaffirm that the ECB is far from done when it comes to interest rate hikes.
This combined with the divergent economic outlooks for the UK and Europe, it’s hard to see why GBPEUR has continued its move lower
On the data front, we’ll be keeping an eye on January’s house price data from Halifax to gauge the impact of higher interest rates on the housing sector.
Last week, we saw mortgage approvals drop to a two and a half year low. The first estimate for growth in Q4 2022 will be out on Friday 10 February. In recent weeks, we’ve seen better than expected growth from the US and Europe, adding to optimism for each respective economy: will the UK be able to shake off its current damning outlook?
From Europe, we have the first estimate of inflation in Germany for the month of January, which is expected to show that inflation has continued to climb higher, as well as the European Commission’s latest economic growth forecasts.
Market sentiment continues to favour further moves lower on GBPEUR unless data can show that the UK economy is in fact performing better than expected.
December downtrend broken?
December’s downtrend began with the ECB (European Central Bank) showing a more hawkish tone versus the BoE (Bank of England) in terms of future interest rate hikes. This downtrend broke following reports suggesting that the ECB may well slow down their pace of interest rate hikes, causing GBPEUR to move 1.8% higher.
This report has since been countered with continued hawkish comments from members of the ECB, causing GBPEUR to back off and weaken.
Last week’s data showed a divergence in expected economic activity for January, favouring the eurozone and adding to the narrative that the eurozone will avoid a recession this year. As a result, the rebound in GBPEUR from the week prior was limited.
From Europe, we’re expecting preliminary GDP figures for Q4 2022, with expectations of annual growth of 1.7% versus 2.3% growth in Q3 2022.
Inflation figures are expected to show headline inflation for January to fall to 9%, with core inflation expected to fall to 5.1%.
In this week’s ECB meeting, we expect the Bank to hike interest rates by 0.50% and ECB President Christine Lagarde to be hawkish with her comments. On the same day, the BoE (Bank of England) is expected to do their last 0.50% hike in this cycle.
Communication for future hikes will be important, as well as how each individual member will vote.
December’s meeting was perceived as dovish. If this narrative continues, particularly with this year’s gloomy outlook for the UK economy, markets will expect rate cuts later this year. Should this be the case, the pound would be expected to weaken.
December downtrend broken?
December’s downtrend began with the ECB (European Central Bank) showing a more hawkish tone versus the BoE (Bank of England) in terms of future interest rate hikes. This downtrend broke following reports suggesting that the ECB may well slow down their pace of interest rate hikes, causing GBPEUR to move 1.8% higher.
This report has since been countered with continued hawkish comments from members of the ECB, causing GBPEUR to back off and weaken.
This week, focus will turn to the growth outlook, with preliminary PMI data for January to be released on Tuesday, 24 January. UK composite PMIs are forecasted to show slowed activity for January from December - which will bring about concerns over the economy.
On the other hand, EU composite PMIs are forecasted to show that activity has continued to rebound higher, adding to recent comments that Europe will avoid a recession this year.
GBPEUR moves will also be dictated by comments from ECB members.
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