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The Pound to Euro exchange rate holds a constructive setup ahead of this week's European Central Bank (ECB) decision and UK economic growth report.
Pound Sterling is close to 2024 highs against the Euro thanks to political uncertainties in France and Germany and evidence the Bank of England will cut interest rates on fewer occasions than the ECB.
The Euro recovered somewhat last week following the collapse of Michel Barnier's government amidst signs the existing budget would be rolled over into 2025, ensuring the French state would continue to function until mid-year elections.
"The market reaction was rather benign, especially in the EUR. For now, we do not see a major euro downside from the political sagas in either Germany or France, and we expect the currency to gain ground," says Dominic Schnider, Strategist at UBS Switzerland AG.
However, the Euro's rebound was shallow, which hints at ongoing upside potential for the GBP/EUR exchange rate.
The conversion is quoted at 1.2070 at the time of writing on Monday, with the Relative Strength Index (RSI) at 53 and pointing higher (lower panel in below chart), confirming near-term upside momentum. It is above the 21-day moving average (currently at 1.2021) and the other key moving averages we watch.
In short, there is nothing to argue against the upside.
If there were to be some weakness in the coming five days, a shallow dip back to the 21 DMA at 1.2021 would be the first objective. Graphical support is also found at a horizontal line at 1.2050.
Dips are still expected to be shallow and the trend is to the top, give or take the potential for sideways consolidation.
The near-term target is 1.2090, which forms part of the nearby horizontal resistance level, which extends to the 2024 two-year best at 1.2103.
A break above here opens the door to 1.2188 in the coming weeks.
The main event for Pound-Euro in the coming week will be Thursday's ECB decision, where another interest rate cut is anticipated.
The consensus sees a 25 basis point cut, although market pricing shows that some are expecting a more forceful 50bp move.
If the latter is delivered, the Euro will weaken, and GBP/EUR will test the 2024 peak of 1.2103 and potentially progress higher.
Andrew Kenningham, Chief Europe Economist at Capital Economics, says although there is a strong case for the ECB to accelerate the pace of policy easing by delivering a 50bp cut next week, a majority of the Governing Council seems to prefer 25bp, which would bring the deposit rate down to 3.0%.
"That said, we think the policy statement will signal that, with downside risks clearly mounting, monetary policy can shift to a more neutral stance before long. And we continue to think the ECB will cut its deposit rate further than investors anticipate next year," he explains.
A 'dovish' ECB message would also be consistent with a softer Euro exchange rate complex.
However, not all roads lead to a weaker Euro and some analysts think the ECB will want to display caution, potentially boosting the currency.
Sandra Horsfield, an economist at Investec, says there is little doubt that a further rate cut is appropriate.
That being said, "the case for using up the remaining ammunition in the arsenal more rapidly, however, is not entirely compelling. There are also tactical considerations to take into account. The unstable political situation in France is not at crisis levels," she explains.
Investec also notes that French government bond spreads might be relatively wide, but yields are at their lowest since early October as part of a wider European bond rally.
"That said, the risk of a confidence crunch that could yet lead to a much steeper downturn in France, spreading through the Eurozone via trade links, has inevitably risen. Keeping powder dry for such an eventuality might be wise," says Horsfield.
She adds that "a steep cut now might fan rather than ease market qualms. Keeping calm and carrying on cutting rates at a moderate pace rather than stepping it up would seem to send a preferable signal."
Such an approach could result in Euro strength on the day, but we think dips in GBP/EUR will be shallow.
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Pound Sterling has some risks on Friday when UK economic output data is produced.
Analysts think the economy contracted by 0.1% month-on-month in October, with anything deeper likely to weigh on the Pound as this would encourage investors to bet on more Bank of England rate cuts in 2025.
Anything stronger, and GBP could strengthen into the weekend. Also of interest on the day will be GfK consumer confidence data, where we will be looking for evidence of further consumer sentiment deterioration in the wake of the government's budget.
The big releases for the Pound come next week when inflation and labour market figures are released, which should provide some finality to expectations for the December 19 Bank of England interest rate decision.