Tech breach points to further gains, eyes on inflation data

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– GBP / EUR at 20 month high
– Broken key technical levels
– But the gains will depend on buoyant global markets
– And expectations of rate hikes
– Bailey says Sunday Bank is likely to hike rates

– Look at the inflation data due Wednesday

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Spot market rate at publication:

GBP / EUR: 1.1855

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The pound sterling exchange rate against the euro (GBP / EUR) broke through a major resistance level suggesting that the technical outlook has improved markedly; however, gains will require a continued favorable global environment and generous Bank of England rate hike expectations.

From a UK calendar perspective, the highlight of the week ahead will be the release of inflation data on Wednesday.

It’s unclear how much of an impact the data will have on the British Pound: data that is generally stronger than expected would be seen as favorable to the British currency and indeed could turn out to be the case.

But 2021 has seen the word ‘stagflation’ mentioned more and more and we might actually see lower than expected inflation supporting the British pound as that would bode well for UK consumers, a major driver of the economy.

There is no certainty as to how the market will handle the data and the reaction could send a clear signal as to the regime currently in place in the market.


Pound to Euro daily chart for the upcoming week's forecast item

Above: GBP / EUR daily chart.

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Mathias Van der Jeugt of KBC Markets says technical considerations have “certainly played a role” in the recent behavior of the pound against the euro.

He says the weekly close at 1.1855 improves the technical outlook for the pound.

The close at 1.1855 means that resistance at 1.1806 (the previous 2021 high) has finally given way and “significant” resistance at 1.1834 has also given way.

A weekly close above these key figures gives Van der Jeugt confirmation that “would surely improve the technical situation”.

The new 2021 high for the British Pound against the Euro is due to a number of factors, including the aforementioned break in technical resistance, expectations of higher interest rates at the Bank of England and the rise of global stock markets.

Rising markets signify a return of investor confidence, which creates a backdrop that tends to favor the pound against the euro and the dollar, due to the “high beta” status of the pound sterling.

It would appear that a number of concerns that dominated the September-early October period have been digested by the markets: 1) global growth is slowing 2) inflation is on the rise and 3) central banks – especially the Fed – Heading for higher interest rate fixing.

Investors are nervous, however, and more sentiment setbacks are likely in the coming days, in which case the pound could drop.

Chances of a Bank of England interest rate hike in November remain high after Governor Andrew Bailey said over the weekend the Bank would raise interest rates based on inflation risks .

Speaking to the Group of 30 – an international body of economic and financial leaders – Bailey said the recent rise in inflation would be temporary, but a surge in energy prices would push it higher and prolong its rise. .

This increased the risk of higher inflation expectations, he said.

“Monetary policy cannot solve supply problems – but it will and must act if we see a risk, especially for medium-term inflation and medium-term inflation expectations,” said Bailey.

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Goldman Sachs forex analysts say the bank’s policy to tighten conditions (rising interest rates, ending quantitative easing) comes amid heightened concerns over soaring inflation expectations .

Goldman Sachs economists are now expecting a hike in the bank rate at the November 4 MPC meeting.

“In general, lower domestic growth is negative for a currency, but higher interest rates are positive,” said Zach Pandl, currency strategist at Goldman Sachs.

“On the net, the change in monetary policy should outweigh the negative currency effects of slower growth in this case, causing the pound to appreciate modestly on the margin,” he adds.

Goldman Sachs and the impact of the rate hike on the pound sterling

Bank of Wall Street researchers say the Bank of England’s approval to hike interest rates is likely to be enough to support the national currency, in part to limit inflation risks from commodity prices. imports, although this introduces more downside risks to growth.

The UK is a net importer of goods, so a stronger currency lowers the relative value of these imports, in turn easing domestic inflationary pressures. In this case, the rise in rates and the fall in inflation (notably via the reduction in the cost of energy imports) are supporting the economic outlook.

The rise in the pound-euro exchange rate is particularly deflationary as the EU is the UK’s largest trading partner.

“The policy tightening caused by a supply shock should be less positive for FX than an equivalent tightening caused by a demand shock, but fears that the BoE’s rate hikes could cause the pound to depreciate sterling (as growth expectations plummet) are unwarranted, ”Pandl said.

(The “misplaced” expectations mentioned here are those of analysts who believe that a rate hike at the Bank of England would be wrong in that it would further reduce the UK’s economic growth potential. of the value of the British pound at the end of September has been attributed to this thought of “policy error”).

“Expect another modest drop in EUR / GBP ahead of the November MPC meeting,” Pandl said.

Inflation: what to watch out for

The key economic release to consider in the heads of the weeks is Wednesday’s inflation data for September.

The market expects the CPI to rise 3.2% year-on-year, which would remain unchanged from the previous month’s reading.

As mentioned so far, it’s not clear whether a stronger or weaker impression will be positive for the pound.

However, we would rather go back to the old assumption that higher than expected inflation is favorable given the sharp rise in the value of sterling for rate hike expectations in recent days.

Hann-Ju Ho, an economist at Lloyds Bank, says inflation could even fall to 3.0% year-on-year, in part because of the base effects of the end of the Eat Out to Help Out program on prices there. a year ago.

“But it will be a temporary respite from rising inflation up to and possibly beyond 4% in the coming months. The increase in the energy price cap will push inflation higher in October. , with a new
significant rise likely next April due to soaring wholesale gas prices, ”Ho said.

Lloyds Bank finds inflation is expected to stay above 4% – twice the Bank of England target – in the second quarter of next year.

“This will present the MPC with a difficult political compromise between supporting the economy and fighting inflation,” Ho said.

It is also worth watching for the release of preliminary PMI data for October, expected on Friday, October 22.

The data will provide a snapshot of how the UK economy is performing during fuel shortages earlier in the month and amid rising inflation expectations and supply chain constraints.

A stronger-than-expected set of numbers would support the pound. The data will also provide insight into the evolution of hiking intentions at UK companies.

Strong demand for labor is expected to signal the end of the holiday scheme at the end of September will not have a material impact on unemployment, which could further strengthen expectations of a rate hike by the Bank of Canada. ‘England.


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