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Pound sterling breaks lower, PMI in focus this week.
The pound to euro exchange rate (GBP/EUR) could recover in the first half of the coming week ahead of an eventual leg lower.
This is according to out Week Ahead forecast model that looks to establish a directional call every Monday.
Last week's edition held the view that the pair was being increasingly constrained within the confines of a triangular consolidative pattern, and we looked for a number of important calendar events to resolve that consolidation:
As can be seen, the resolution was to the downside, in keeping with the trend that led up to the summer consolidation.
A notable impulse of euro buying sparked the move last Tuesday, which was then given further impetus by Thursday's Bank of England decision and topped off by Friday's news that the UK government borrowed far more money in August than was expected.
The selloff takes the GBP/EUR below its nine-day exponential moving average (EMA), confirming the downside is preferred in the coming five days.
At the same time, the selloff leaves the exchange rate notably deviated from the nine-day EMA, meaning it is oversold somewhat. We would anticipate a divergence via a short-term recovery in the coming hours to couple of days.
However, any strength is anticipated to be tepid and technical in nature. Directionally, we would look for the next notable move to be to the downside and a test of 1.1413 is likely in the coming weeks.
Tuesday's PMI data from the Eurozone and UK forms the week's data highlight and we would look for some volatility on the day.
The Eurozone is expected to report a composite PMI of 51.1 in September, a shave higher than the 51 reported in August.
The UK is expected to report a services PMI reading (this is the UK's most important sector and the services PMI is given greater scrutiny than the composite) of 53.6, which is consistent with a decent clip in the growth rate.
The rule of thumb, as always, is that anything above this would boost the currency, and anything below would weigh.
We would also look at the sub-components of the report, particularly inflationary and employment subcomponents. They should tell us whether the labour market continues to deteriorate (which could encourage further rate cuts at the Bank of England) and whether inflationary pressures remain high (which should encourage a more cautious approach).
Last week's Bank of England decision saw rates left on hold, but the Bank did signal it was prepared to cut interest rates again. As a result, markets raised the odds of another cut happening before year-end, which weighed on the pound.
"EUR/GBP is now moving in line with its short rates differential, and our new Global Economic Outlook expects the ECB to have completed 80–90% of its easing cycle, while the BoE has only completed 50–60%. The probability of a BoE cut in November is now close to 50–50, leaving room for near-term GBP downside," says a recent note from Société Générale.
The bank expects GBP/EUR to head towards its target of 1.11 in the coming months.