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Pound Sterling rises into a wall of resistance, Eurozone and UK inflation and PMI data in focus.
Technical resistance has stalled a recovery in the Pound to Euro exchange rate (GBP/EUR), although the underlying trend still looks relatively constructive, meaning more gains are possible in the coming five days.
Last Monday's Week Ahead Forecast looked for the pair to rise up to the 1.16-1.1613 area, where we predicted increased selling interest would emerge and a potential pullback would ensue.
The belief was that this resistance zone, which had frustrated the Pound in the past, was still in existence and would come into play once more.
The annotations below were created last Monday to show the likely price action, and they have been proven correct:
Looking ahead to this week, we anticipate the resistance line at 1.16-1.1613 to remain in place and frustrate further upside.
That being said, momentum is positive with the Relative Strength Index (RSI) at 52.86 and pointing higher. The exchange rate is also above the nine-day exponential moving average (EMA), which advocates for further near-term gains.
So, we could be in a period of short-term consolidation as opposed to an outright failure in the pair's recovery, which can protect Sterling from excessive downside.
Declines to 1.1560 are possible in the first few days of the week ahead of an eventual pickup in buying interest that can take the pair clear of 1.1613.
But the return of strength will depend on this week's data outcome, as we have an important few days of data to look forward to. We would anticipate relatively subdued trading conditions ahead of Wednesday's UK inflation print, which is anticipated to show ongoing price pressures in the UK.
The market has reduced the amount of intrest rate cuts it expects from the Bank of England during the course of the coming months on account of still-high inflation.
Should Wednesday's figures beat expectations (3.7% is the consensus prediction), then that change in stance will have been verified. The market sees it as increasingly questionable that the Bank can continue its dogged approach to lowering interest rates when inflation continues to rise ever further above its 2.0% target.
"Having risen to 3.6% y/y in June, we suspect the headline rate of UK CPI inflation picked up further in July, rising to 3.7% y/y. A key contributor to the move is expected to come from an acceleration in services CPI inflation from 4.7% y/y to 4.8% y/y," says a note from Lloyds Bank.
Falling rate cut bets have bolstered the Pound, which rallied after the Bank's August 07 policy decision that hinted that further cuts are not guaranteed, ensuring UK interest rates will remain higher than those in the Eurozone for some time.
In fact, the Pound is the best-performing major currency in August on account of expectations the UK will have the highest interest rates in the G10 over the coming months.
However, should the inflation data undershoot expectations, then bets for a November rate cut at the Bank of England will grow again, putting pressure on the Pound.
Wednesday's Eurozone CPI is also worth watching as it could challenge the notion the European Central Bank (ECB) has finished cutting rates.
Should inflation undershoot the 2.3% CPI inflation rise that is expected, then bets for a September rate cut will grow, pressuring the Euro.
For GBP/EUR to exceed 1.16 in a meaningful manner, we would need a combination of above-consensus UK inflation to combine with a below-consensus Eurozone reading. The opposite outcome would obviously pressure the pair.
All eyes will also be on Thursday's PMI survey results, that will give a snapshot of activity in the Eurozone and UK for August. Last month we saw GBP/EUR fall as the Eurozone's figures beat expectations while those of the UK showed slowing momentum.
"The Composite PMI slipped from June’s nine-month high in July, but at 51.5, still signalled a modest expansion in private sector business activity at the start of the third quarter. We expect it to have rebounded in August led by a further nudge up in the services reading," says Lloyds Bank of the UK's Composite PMI.
Should this view be the correct one, then the Pound could find itself better supported through the latter half of the week.
Also keep an eye on Friday's UK retail sales data as these have moved the Pound quite meaningfully in the past. Retail sales give a good insight into the all-important UK consumer, the engine of the UK economy.
Strength here can help the Pound, although we would be wary spending is coming under pressure amidst rising inflation rates.
A sombre below-expectation reading could lead to a soft Friday for the British Pound.