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Pound Sterling's consolidation against the Euro must surely end in this action-packed week.
Pound sterling is in focus this week with wage and unemployment data due Tuesday, inflation on Wednesday and the Bank of England decision on Thursday.
These data will give an important insight into how the economy is faring and will determine which direction an anticipated breakout in the pound to euro exchange rate (GBP/EUR) potentially evolves.
The pair opens the new week at 1.1550, which places it towards the middle of the summer range. The exchange rate has been steadily consolidating since July, with volatility fading notably during September.
The result is the formation of a triangular consolidation pattern on the daily chart that resembles a coiling spring, ready to release its latent energy:
For those wanting a stronger pound, the hope is that when the spring uncoils it does so to the upside and a sudden break through the consolidative triangle occurs, taking the pair to the upper-bound of the summer range at 1.1613, and then eventually higher.
For those wanting a stronger euro, the hope is that the trend of GBP/EUR weakness that preceded the summer consolidation reasserts itself, pushing the pair to 1.1413 and then to fresh 2025 lows below here.
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There is still an element of uncertainty as to whether the pound is ready to trend against the euro, in either direction, or whether we will simply see big inter-day moves that ultimately respect the current range. Regardless, volatility will be welcome following weeks of dour trade.
Of course, how the GBP/EUR exchange rate evolves in the coming days will depend on how the data lands:
Tuesday's wage figures will be watched closely for signs of a slowdown, which would encourage the Bank of England to believe the meaningful decline in inflation that they have long predicted (but has never quite materialised) will finally occur at some point next year.
The expectation is for average earnings to rise by 4.7% y/y, anything above this can boost the pound, and anything below can weigh.
Turning to the employment situation, a further deterioration in the labour market is expected with another decline in the PAYE measurement of employment change:
Above: UK monthly changes in employment according to the PAYE series.
Midweek sees the release of inflation figures, which come on the same day the Bank of England starts deliberating whether or not to cut interest rates.
It will therefore be an important release, with policymakers at the Bank hoping that the expected increase in inflation is less severe than expected.
UK CPI inflation for August is expected to remain steady at 3.8%, in line with the Bank’s forecast, yet still well above the 2% target.
Core and services CPI inflation are expected to drop by 0.2pp each, to 3.6% and 4.8% respectively.
Should inflation beat expectations the pound should rise, as it would confirm the Bank has limited scope to cut interest rates again this year.
However, a significant beat of expectations might also be unwelcome for the pound if the market thinks the UK is headed for a period of stagflation (high inflation, low growth).
An undershoot in expectations would weigh on sterling, sending GBP/EUR lower towards 1.15.
File image of Andrew Bailey. Image © Pound Sterling Live, Still Courtesy of Bloomberg TV.
Thursday will see the Bank announce the outcome of its two-day meeting, and rates are anticipated to be left unchanged.
However, the tone of the guidance will be of interest to investors and impact how the pound behaves.
Current market pricing shows investors are not expecting another cut, meaning there is scope for pricing to swing back towards favouring a cut in November. The Bank might encourage this if it wants to stick to a quarterly pace of rate reductions.
If bets for a November cut start to grow again, then the pound can come under pressure again.
However, economists we follow think the Bank will err on the side of caution, ensuring it maintains previous guidance that it remains data dependent.
Bottom line: a steady-as-she goes Bank of England event should underpin UK interest rates, which are amongst the highest in the developed world, which in turn supports the pound.
Also note that it is expected to announce a reduction in its quantitative tightening programme, whereby it slows down the pace at which it sells its holding of government bonds. This is an attempt to help steady the under-pressure bond market. The expectation is that QT is lowered from £100BN / year to £75BN. Any surprises here could also impact the pound.