– GBP / EUR supported at 1.1617 & 1.1550 lower
– Can break 1.17, test 1.18 if the BoE is worried about inflation
– PMI surveys in sight ahead of the BoE, in a calm week for the EUR

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  • GBP / EUR reference rate at publication:
  • Place: 1.1633
  • Bank transfers (indicative guide): 1.1326-1.1407
  • Specialist money transfer rates (indicative): 1.1550-1.1575
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The exchange rate of the pound against the euro enters a pivotal week after holding comfortably above 1.16 even after a sharp decline on Friday, and could have the possibility of retesting its highs of 2021 around 1.18 over the next few days if there is a “hawkish” tint at the last bank of england (BoE) policy update Thursday.

The British pound ended the week in the red against many currencies due to risk aversion in the broader global financial markets as well as what may have been upset or otherwise cautious about the retail sales report UK for the month of May.

Retail sales fell -1.4% last month as the consensus among economists was around 1.5% increase, although the decline and disappointment among observers and market participants were not occurred only after an almost unprecedented increase of 9.2% the previous month and therefore mainly reflects the statistical base effects.

More important among the data from last week, and certainly with regard to the price development over the next few days, were the inflation figures for the month of May, which showed both the main price index consumption and the adjusted measure that overlooks energy prices each increasing to or above the BoE’s 2% target.

What BoE policymakers have read about it might be informative of the tone adopted by the BoE and Governor Andrew Bailey in the latest monetary policy update scheduled for Thursday at 12:00 p.m. London time, which is the highlight. of the week for Sterling.

“The BoE does not aim to exceed the target, like the Fed, nor to pursue a policy based on results. Politics is tied to forecasts that will inevitably change with the data. And growth and inflation are exceeding BoE forecasts. We expect this to continue, ”says Robert Wood, economist at BofA Global Research.

“The outperformance has already prompted rate setters to reassess their point of view. One of the BoE’s more conciliatory rate-setters, Gertjan Vlieghe, expects a rate hike in the second half of 2022 if the data follows the central BoE forecast, ”Wood adds.

GBP EUR per day

Above: Pound to Euro rate at daily intervals with 55, 100, and 200 day moving averages and Fibonacci retracements of the April rally.

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The BoE said in May that it would not hesitate to take action – possibly raising the bank rate from its current threshold of 0.10% – in case the nascent rise in inflation hits the target. 2% would turn out to be more than just a post-pandemic phenomenon, which means there is certainly a possibility that there is a tinge of “hawkish” in his comments on the outlook this week.

“Although retail sales in May lost some of their earlier gains, a solid increase in employment suggests that the recovery is still on track. Meanwhile, a rise in inflation in the same month mainly reflected factors linked to the pandemic, ”says Martin Beck, chief UK economist at Oxford economy.

“A postponement of the final stage of easing national Covid restrictions should prove to be only a small obstacle on the path to economic recovery. We still expect GDP to return to pre-pandemic levels before the end of this year, ”adds Beck.

Despite the above, no one can guess what the outcome of this week’s meeting will mean for the pound sterling, not least because Governor Bailey warned after the last BoE meeting of downside risks to his latest round of economic forecasts, which were announced in May, and envision a 2021 GDP growth rate that would be the strongest seen in the UK since shortly after World War II.

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One of the various reasons these forecasts pose downside risks is uncertainty about the trajectory of the coronavirus and the extent to which any further increase in infections could lead to a return of restrictions on the economy on business activities. and social contacts: it may be important in this regard, that since then the government has extended the duration of its last restrictions, which could potentially be seen by the BoE as an attempt to crystallize these risks at the drop.

Nonetheless and after starting the new week around 1.1630, the Pound-Euro exchange rate will benefit from a cluster of close support levels, as between 1.1550 and 1.1600 there are two main moving averages as well as ‘a Fibonacci retracement level that could break the fall of the pound sterling. in all bouts of weakness: translated into EUR / GBP terms, this implies strong resistance between 0.8620 and 0.8658.

“The price action has all the hallmarks of a sharp short positional adjustment – suggesting that most of the correction may have taken place. Still, we think the Fed’s rhetoric could see EUR / USD correcting a bit lower this week, ”said Chris Turner, Global Head of Markets and Regional Head of Research at ING.

The advantage of the entry point of the pound in the new week will largely depend on what the US dollar does over the next few days, as this has a particularly indirect influence on the exchange rate of the pound against to the euro, which would trade as high as 1.1800 after the BoE’s decision if Thursday’s update proved favorable to the pound while at the same time the dollar continued to maintain the pressure on other currencies due to the impact the latter would likely have on EUR / USD.


Above: Pound to Euro rate at weekly intervals with GBP / USD and EUR / USD.

The Euro-dollar rate has a substantial direct influence on the GBP / EUR and therefore if the former was not able to significantly exceed its Friday closing level of 1.1850 this week, then the exchange rate pound -euro could find itself up at least briefly. up to 1.18 even though the main GBP / USD exchange rate were to retrace only part of the Federal Reserve (Fed) -inspired decline last week in response to the BoE on Thursday.

The pound-to-dollar rate fell from around 1.41 last Monday to around 1.38 at Friday’s close after the Fed surprised the market by adjusting its own monetary policy stance in a “hawkish” direction and would still hold onto a corrective downward trajectory even though GBP / USD was to retrace 50% of the June drop from 1.4240: this, although not a big move in GBP / USD, would provide a powerful boost to GBP / EUR if it were to be combined with a lethargic performance of EUR / USD.

“After the Fed, we are adjusting our USD risk here and going short EUR / GBP to express the bullish view of the GBP in the BOE next week,” said Jordan Rochester, strategist at Nomura. “We expect the GBP to outperform, but are looking to lower our USD risk and take profits on our long GBP / USD purchases. Instead, we move to EUR / GBP cash short (entry: 0.8550 ; objective 0.83, stop 0.8750). “

There is little economic data in the calendar to impact the single European currency this week as before Thursday’s Bank of England update there are only the latest IHS Markit PMI surveys on UK manufacturing and services sectors to occupy the pound: these survey indices have recently reached record highs and whether they remain correct ascending or rather lower could be an important signal of the economy’s trajectory British in the coming months.