Pound Sterling vs. Euro and Dollar Week Ahead Forecast : UK Inflation, Retail Sales In Focus

Warren Takunda

Forex

Central Bank

Traders' Opinions

Economic

Summary:

In the upcoming week, the Pound shows positive momentum against the Euro and Dollar. The Pound-to-Euro rate rises due to strong UK PMI data, while the Pound-to-Dollar rate remains bullish despite a minor setback. The Bank of England's hawkish stance supports the Pound. Key events include UK inflation data, with potential effects on the Pound's performance, and later in the week, focus shifts to retail sales and GDP figures.

The British pound enters the new week with some positive technical momentum that leaves it looking constructive against both the Euro and Dollar, but the release of inflation figures midweek could challenge recent moves.

Our Pound to Euro exchange rate week ahead forecast sees positive short-term momentum owing to Friday's sharp rally that followed the release of better-than-expected UK PMI data that showed the economy likely grew comfortably in December.

On the other hand, the Eurozone PMIs disappointed and suggested the economy shrank, triggering a rise in Pound-Euro to a high of 1.1668.

Analyst Bill McNamara at The Technical Trader says the pair is pointed higher over the near-term horizon: "Some near-term resistance is still possible at that previous peak but, if it gives way, a return to the 2023 peak (at 1.1743) becomes a realistic expectation.

Nick Rees, FX Market Analyst at Monex Europe, says Pound-Euro could now be well on track for Monex's year-end target of 1.17.

"We see this as a more positive backdrop for sterling than the euro over coming months," says Rees.

Those watching this exchange rate should be aware that the Pound-Euro has struggled to break above 1.17 on any meaningful basis in 2023, and we are wary of another failure in the rally above here. Readers with payment requirements should view forays above 1.17 as likely to be short-lived and act accordingly.

Pound Sterling vs. Euro and Dollar Week Ahead Forecast : UK Inflation, Retail Sales In Focus_1

The Pound to Dollar exchange rate week ahead forecast is bullish, thanks to the +1.5% surge seen last week, which ensures the momentum dashboard is green and advocating for further gains.

Sure, Pound-Dollar suffered a setback on Friday following the comments of Federal Reserve board member John Williams, who injected a dose of reality into what was becoming an exuberant market response to the Fed's midweek interest rate decision and guidance update.

But, Pound Sterling is unlikely to suffer too deeply near-term and "dip buyers are likely to emerge as BoE remains more hawkish vs Fed for now," says Justin McQueen, a Reuters market analyst.

A break below 1.27 opens up support at 1.2670, says McQueen.

Pound Sterling vs. Euro and Dollar Week Ahead Forecast : UK Inflation, Retail Sales In Focus_2

Above: GBPUSD at daily intervals.

Shaun Osborne, Chief FX Strategist at Scotiabank, says the balance of risks favours further gains by the Pound.

"Trend dynamics are strongly bullish across short-, medium– and long-term oscillators and the pound is set for a strong close on the week—all of which tilt directional risks clearly towards more GBP gains and a push on to 1.2880/00 shortly," he says.

The Pound to Dollar exchange rate's jump back above 1.27 follows last week's U.S. Federal Reserve guidance that effectively condoned market bets for several rate cuts in 2024, with Fed Chair Jerome Powell saying he was alert to risks of keeping interest rates restrictive for too long.

This pivot weighed on the Dollar more broadly and stands in contrast to the Bank of England's more 'hawkish' tone.

The Pound was boosted by the Bank of England's latest policy decision and guidance, which saw the Bank warn inflation risks were still tilted higher and it cannot definitively rule out further rate hikes.

The Bank's message was underpinned on Friday by December PMI figures showing the economy has seen a surprisingly strong pick-up in activity.

Furthermore, the survey revealed price pressures in the services sector remain acute, thereby lending the Bank of England's guidance some credibility and boosting the Pound.

In contrast to those of the UK, the Eurozone's PMI figures disappointed, drawing questions about the European Central Bank's message that rates will stay higher for longer and encouraging markets to expect cuts to come sooner rather than later.

The divergence in fortunes between the UK and Eurozone was reflected in the rise in the Pound-Euro rate.

This week's UK inflation data can underpin the recent GBP-supportive narrative if it prints at higher-than-expected levels.

CPI inflation is due for release on Wednesday at 07:00 GMT and is expected to print at 4.4% year-on-year, down from 4.6% previously, with the core CPI reading expected at 5.5%.

Should the data undershoot, we could see the Pound come under pressure through the midweek session.

"Base effects in the food category is likely to be the largest source of downward pressure in November. Lower petrol prices should also weigh on headline inflation," says a note from Oxford Economics.

Retail sales and quarterly GDP figures will cap the week off, with markets looking for retail sales to print at -1.1% year-on-year for November. Quarterly GDP is expected to be flat at 0% quarter-on-quarter in the third quarter.

Note that much of the sting in GDP from a market perspective will have been removed by last week's monthly GDP release, so this is expected to have a limited impact on the Pound.

Source : Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

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Zi Cheng

Forex

Traders' Opinions

Australia's economy showcases resilience, buoyed by strong employment outcomes and increasing incomes, as data released last week indicates. Additionally, the enhanced Purchasing Managers Index (PMI) data for December has bolstered the Australian Dollar.

Traders are expected to observe the Meeting Minutes from the Reserve Bank of Australia (RBA) set to be released on Tuesday, alongside Building Permits and Housing Starts data from Australia. Furthermore, on Wednesday, the People's Bank of China (PBoC) is scheduled to announce its Interest Rate Decision, adding to the key events influencing the Aussie Dollar.

Australian Trade Minister Don Farrell expressed confidence on Sky News TV that China will remove punitive tariffs on Australian wine. Notably, China has already lifted trade restrictions on the majority of Australian exports that had been previously imposed, indicating a gradual improvement in relations between the two countries.

The US Dollar Index (DXY) loses its ground and retraces the recent gains on Monday. The DXY rebounded from a four-month low at 101.77 marked on Thursday, having received support from the improved short-term yield on the US Treasury bond. The 2-year US bond yield improved to 4.48% on Friday.

Additionally, the moderate preliminary Purchasing Managers Index (PMI) for December contributed support for the USD. S&P Global Services PMI rose to 51.3 from 50.8 prior. While Manufacturing PMI declined to 48.2 from 49.4. Investors will focus on Consumer Confidence and Existing Home Sales Change on Wednesday.

However, the Greenback encounters challenges stemming from a weakened sentiment, primarily influenced by the Federal Open Market Committee's (FOMC) dovish statement. Additionally, dovish remarks from various Fed members exert pressure on the Greenback.

Atlanta Fed President Raphael Bostic, on Friday, anticipated a potential interest rate cut in the third quarter of 2024 if inflation follows the expected trajectory. Furthermore, Chicago Fed President Austan Goolsbee did not rule out the possibility of a rate cut at the Fed's meeting next March.

Daily Digest Market Movers: Australian Dollar seems hawkish as economy shows resilience

The preliminary Judo Bank Composite PMI improved to 47.4 from the previous reading 46.2. The Manufacturing PMI for the same period registered 47.8, a slight increase from the prior figure of 47.7. Additionally, the Services PMI grew to 47.6 compared to the previous reading of 46.0.

Australia’s Consumer Inflation Expectations for December eased at 4.5% against the previous figures of 4.9%.

The seasonally adjusted Aussie Employment Change (Nov) improved substantially to 61.5K compared to the expected 11.0K. Unemployment Rate rose to 3.9% from 3.7% previously.

The People's Bank of China (PBoC) kept its 1-year Medium-term Lending Facility (MLF) rate unchanged at 2.5%. Additionally, PBoC injected 1.45 trillion Yuan to bolster bank liquidity as 650 billion Yuan worth of MLF loans were matured.

The National Bureau of Statistics of China revealed that Industrial Production (YoY) improved to 6.6% in November from 4.6% prior, exceeding the market expectation of 5.6%. However, China Retail Sales (YoY) rose to 10.1% from 7.6% prior, falling short of the market consensus of a 12.5% rise.

Federal Reserve (Fed) maintained interest rates at 5.5% in its December policy meeting as expected. Markets are now projecting three rate cuts for 2024.

US Retail Sales (MoM) rose 0.3% in November, compared to the expected decline of 0.1%. Initial Jobless Claims for the week ending on December 8 came in at 202K against the 220K expected.

Technical Analysis: Australian Dollar hovers around the 0.6700 post testing recent high

The Australian Dollar trades higher around 0.6720 on Monday, having recently tested a five-month high at 0.6728 on Friday. A prevailing bullish sentiment could propel the AUD/USD pair to surpass the recent high and approach the pivotal barrier at 0.6750. On the downside, noteworthy support lies at 0.6720. A break below the latter could push the pair to navigate the major level at 0.6650, followed by the 23.6% Fibonacci retracement at 0.6619, and subsequently reaching the psychological support at 0.6600, aligned with the 21-day Exponential Moving Average (EMA) at 0.6597.

Australian Dollar Remains Bullish on Anticipation of Fed Rate Cuts_1

AUD/USD: Daily Chart

Source: FXSTREET

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Palestinian-Israeli conflict

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