Image © Pound Sterling Live
Pound Sterling is in an uptrend against the Euro that looks set to extend in the coming five days; however, beware of volatility around Bank of England speeches and Thursday's PMI release.
The daily chart is constructive with momentum indicators positive and advocating for further gains. Notably, the Relative Strength Index is positive at 60 and points higher.
The pair is well above all its key averages, and any pullbacks from here should find buying interest at the nine-day moving average, now located at 1.1974.
The Pound to Euro exchange rate saw a setback in early October (-1.0%) but has spent the remainder of the month retracing that decline.
The recovery saw the pair hit a fresh two-year high at 1.2054 on Friday but was unable to hold the advance and actually closed the day in the red at 1.2007.
A look at the chart shows it has struggled to make any major progress beyond 1.20 in 2024, with immense selling interest above here:
Above: GBP/EUR at daily intervals.
If we consider that the most competitive payment providers will need the spot market to hit approximately 1.2030-1.2040 to offer clients a rate of 1.20, then it becomes clear that there is huge transactional interest around here.
The question for this week, then, is whether or not the Pound can muster the strength to record a close well above 1.20.
Jeremy Stretch, a strategist at CIBC Capital Markets, says a close above 1.2050 would leave open the prospect of an extension towards 2022 highs at 1.2190.
However, he cautions that this week's PMI data for October (due Thursday) would need to come in strong for the bullish scenario to be fulfilled.
We are also wary that the Bank of England's Governor Andrew Bailey is due to speak this week (Tuesday), as are a number of other members of the Bank's Monetary Policy Committee (MPC).
The risk is that Bailey sees signs in the recent data that would allow for a quickening in the pace that the Bank cuts interest rates.
"Market participants would be looking for any indications that there is now growing support at the MPC for more aggressive easing ahead. The GBP could remain vulnerable in the very near term as a result even though we recognise that some negatives are in the price of the currency and it no longer looks as overbought or overvalued as before," says Valentin Marinov, Head of FX Strategy at Crédit Agricole.
Last week's inflation figures roundly undershot expectations, and this could allow the MPC to cut in November and then again in December.
A November cut is fully priced by the market and wouldn't offer the Pound any troubles, but December is only priced at about 50/50 odds.
If expectations for December rise towards 100% then the Pound can come under pressure.
Last Friday's stronger-than-forecast UK retail sales activity reinforces the case for a cautious Bank of England easing cycle. On the other hand, additional European Central Bank easing is low, and analysts say this will represent an ongoing drag for the Euro.
"Bottom line: the relative monetary policy trend between the ECB and BOE still favours a lower EUR/GBP," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman.