- Technicals advocate for further gains
- 1.19 resistance is providing a roadblock near-term
- Inflation due midweek
- And PMIs for May on Thursday
Image © Adobe Images
Pound Sterling can extend gains against the Euro, with midweek inflation figures forming the highlight for the week ahead.
The Pound to Euro exchange rate is in a soft uptrend that is set to continue in the coming days amidst fading global equity market volatility, a big EU-UK reset and still-hot inflationary pressures.
Equity markets have been steadily recovering through April and into May and volatility has been falling, which is the overarching driver of a steady rise in the Pound-Euro (GBP/EUR).
The EU and UK are set to announce a new deal that should make trade easier, and as analysts point out, the Pound tends to do better when the UK is more closely aligned with Europe.
All this underpins the narrative of a gentle GBP/EUR uptrend that remains intact, as per the below:
From a technical perspective, the GBP/EUR can churn around current levels and then head higher, as long as the rising trend line continues to provide support. The same applies to the need to remain above the nine-day exponential moving average (the light blue line in the above).
Because the market is above these two key indicators, we forecast a move above 1.19 in the coming few days, with the usual ups and downs that this exchange rate offers, but see an eventual move towards the mid-1.19s in the next week or two.
On Wednesday, UK inflation is released, and this should provide a catalyst for losses or gains. Just keep an eye on the 1.19 resistance line that appears to be thwarting attempts to move higher.
The market consensus forecast is that it surged 1.1% month-on-month in April, launching the annual rate far beyond the Bank of England's 2.0% target to 3.3%.
The Bank cut interest rates in early May, arguing that this surge in inflation is merely temporary and inflation will fall below target in the near future. But the market will be scouring the report's details for any signal that this evergreen optimism displayed by the Bank of England is unfounded and that the ingredients for embedded above-target inflation dynamics litter the finer details.
If elements of the report, such as services inflation, make for uncomfortable reading, then the higher-for-longer UK interest rate theme will remain intact, helping Pound Sterling extend recent gains.
However, any undershoot in the figures would likely prompt markets to bet that the Bank of England's optimism is well placed, and that they might soon signal they can accelerate the rate cutting process in the coming months.
This outcome would weigh on the Pound.
The Pound has shown a weak reaction function to domestic data of late, and it would take an eye-opening surprise to really get the FX market's juices flowing and deliver some nice moves in the Pound.
Perhaps PMI data for May, due out the following day, will be the bigger event.
After all, it is the market's go-to snapshot for immediate data that can tell us how an economy is responding to recent events.
These PMI data will help investors interrogate the UK's significant employment tax and minimum wage hikes of April, as well as the impact fading tariff fears have had on the economy. It will also cover any sentiment response to the UK-U.S. trade agreement.
The PMI survey also offers a leading indicator of inflation, and could answer some of those questions markets will be searching for in the official figures released a day prior. Also remember that employment dynamics and price setting intentions will offer insights into future inflationary developments.
Stepping away from the data calendar, the market is showing a preference to fade any knee-jerk responses to the releases, as highlighted by the lacklustre FX response to last week's official jobs report, deferring instead to the bigger picture that is the global backdrop.
As readers are all too well aware, the FX market is hooked on U.S. President Donald Trump's trade policy manoeuvres, and we are now in a stage where Trump is rowing back from the excesses of the April 02 tariff announcements.
The associated decline in market volatility has benefited the Pound against the Euro.