Support group Beckons on the maps

  • GBP/EUR muffled and suppressed by economic headwinds
  • BoE Rate Forecast and Outlook Leaves GBP/EUR Stuck
  • A group of technical support levels await near 1.1800
  • GBP/EUR consolidation possible as UK GDP data considered

Photo © Adobe Stock

The exchange rate between the pound and the euro was stifled last week when the Bank of England (BoE) spooked the market with sharp downward revisions to its economic forecast, forcing the pound down and the leaving to risk slipping into a group of technical support levels around 1.18 in the coming days.

The pound had made another straight for the 1.20 level early last week as the euro was given plenty of room to maneuver after Russian gas supplies to Europe were reportedly still reduced and water levels on the Rhine in Germany have fallen further, threatening another important source of energy. supply.

But the pound’s exchange rate against the euro was brought down to earth in a brutal way after the Bank of England raised the bank rate for the sixth time to 1.75%, but warned of an impending recession that is expected to last more than a year. year.

“For the currency, this is not a good result. Nonetheless, the Sterling short market narrative is very mature and positioned. It’s hard to see the new incremental negative driver,” says Paul Robson, European Head of G10 FX Strategy at Natwest Markets.

“A potentially understated theme is that the BoE’s projections are more realistic than the Fed’s or the ECB’s. The ECB could post very similar forecasts a few months from now,” Robson and his colleagues said on Friday before suggesting clients to accept any further decline in GBP/EUR.

Above: Pound exchange rate against the Euro displayed at daily intervals with selected moving averages and Fibonacci retracements of the July rally indicating possible areas of near-term technical support for the Pound. Click on the image for a closer inspection.

The BoE announced its biggest interest rate hike since 1995 amid fears that domestic firms will continue to raise their own prices in response to imported inflation through energy and traded goods prices at an international level.

But he also appeared to defeat his economic forecasts by forecasting that the predicted economic downturn would be deeper and longer than the recessions seen in the early 1990s and early 1980s.

“We believe weak growth prospects in the UK have weighed on the pound’s performance throughout the year. This means the pound hasn’t benefited much from the fact that the Bank started its rate hike cycle earlier than many of its G10 peers,” says Jane Foley, head of FX strategy at Rabobank.

“Despite our negative outlook for the GBP, a lot of bad news is already in the price. On the other hand, we see the risk that the market has not yet fully priced in the headwinds facing the Eurozone economy” , Foley said last week as he reiterated a forecast for GBP/EUR to trade near 1.19 over the next three months.

The recession forecast is a by-product of household energy bills set to rise in October to £3,500 a year or more, which will erode or otherwise suppress household disposable income and jeopardize the many other sectors of economy that depend on discretionary spending.

Above: Pound exchange rate against the Euro displayed at weekly intervals with selected moving averages and Fibonacci retracements of the September 2020 rebound indicating possible medium-term technical support for the Pound. Click on the image for a closer inspection.

“The peak recession risk point will be in the fourth and first quarters, when households will be reeling from a huge rise in energy bills. But with additional government support likely to be announced shortly after the As the new Prime Minister takes office, and with households still holding considerable savings, a recession is not inevitable,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The BoE’s forecast and indication that it may continue to raise interest rates in the coming months does little to encourage market enthusiasm or appetite for the pound, although the outlook for economies European Unions and the single currency remain just as gloomy.

It is somewhat of a compensation and a cushion for the exchange rate between the Pound and the Euro, which can also benefit from several levels of technical support nearby on the charts during any moment of weakness. in the coming days.

The calendar for the week ahead is devoid of major appointments for the pound and the euro ahead of the release on Friday of UK GDP data for June and the second quarter, both of which are expected to show economic contractions, although it is unclear what implications this would have. for Sterling.

“The consensus for a 1.2% month-on-month drop in GDP in June, driven by the additional Platinum Jubilee holiday, seems overly optimistic. We expect Friday’s report to show GDP fell by around 1.6%,” Tombs warns.

Comments are closed.