– Written by
Frank Davies
STORY LINK British Pound to Euro Forecast: GBP Bounces from Two-Week Lows
The Pound to Euro exchange rate (GBP/EUR) recovered from two-week lows below 1.1650, but Sterling has struggled to regain the important 1.1700 level as resilient economic data on both sides of the Channel limits directional momentum.
Stronger UK business activity has provided support, while improving Eurozone growth, substantial capital inflows and expectations of further ECB tightening have helped the Euro resist renewed selling.
GBP/EUR Forecasts: Holding Below 1.17
The Pound to Euro (GBP/EUR) exchange rate recovered from two-week lows below 1.1650 during the second half of the week, although Sterling struggled to regain the 1.1700 level.
GBP/EUR traded around 1.1675 on Friday, leaving the pair broadly rangebound after Wednesday’s sharp decline.
A sustained break below 1.1650 would still risk a deterioration in sentiment and potentially expose the 1.1600 area.
Markets are continuing to monitor bond and energy markets closely, with elevated UK yields offering Sterling some carry support but also maintaining concerns over government debt-servicing costs.
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Energy prices remain another important risk.
Higher gas and oil prices would increase stagflation concerns in both the UK and Eurozone, although the single currency remains particularly exposed to disruption in imported energy supplies.
European gas inventories are already at historically low levels for the time of year, while oil prices strengthened again on Friday amid renewed US-Iran tensions.
Brent crude closed around $94.40 per barrel, gaining more than 6% over the week.
UK Data Shows Resilient Economy but Fiscal Risks Persist
Friday’s UK business surveys provided a relatively encouraging signal.
The S&P Global services PMI increased to a six-month high of 52.8 in August from 52.1 in July, comfortably beating expectations for a slowdown.
Manufacturing remained in expansion territory at 51.5, while business optimism in the services sector climbed to a seven-month high.
The stronger PMI figures followed an improvement in the CBI industrial trends survey.
The CBI orders balance had increased to -25 in August from -45 previously, substantially stronger than consensus forecasts.
CBI Senior Economist Cameron Martin commented; “Stronger global demand is providing some welcome relief for manufacturers, with export order books improving sharply and lifting overall orders.”
He added; “However, it is too soon to know whether this marks the beginning of a sustained shift in conditions, particularly given ongoing cost pressures reported by manufacturers.”
Other Friday data was more mixed.
UK retail sales fell 0.5% in July after June’s World Cup-related boost, while government borrowing figures showed an unexpected £1.8bn deficit.
Borrowing reached £56.7bn during the first four months of the financial year, around £2.3bn above the Office for Budget Responsibility’s forecast.
Consumer sentiment was more encouraging, with the GfK confidence index improving to -14 from -17 and reaching its strongest level in two years.
The combination leaves the UK economy looking relatively resilient, but the public finances remain a source of concern ahead of the autumn Budget.
Eurozone Growth and Capital Flows Support Euro
The Euro also received support from stronger economic data on Friday.
The Eurozone composite PMI increased to 52.1 in August from 52.0, reaching its strongest level since November.
Manufacturing strengthened further, with the PMI rising to 52.8, its highest level in four-and-a-half years.
New orders increased at their fastest pace in more than three years, while export orders rose for the first time since Russia’s invasion of Ukraine.
The stronger data reinforced expectations that the European Central Bank could tighten policy further, particularly if elevated energy prices keep inflation pressures persistent.
Underlying capital flows also remain supportive for the Euro.
ING noted; “Behind the scenes, foreigners are also buying a lot of eurozone debt and equities.”
The bank added that ECB data showed overseas investors had bought around €1.1trn of Eurozone securities over the previous 12 months, with June recording particularly strong debt purchases.
These inflows reinforce the broader narrative of international investors diversifying away from US assets and towards Europe.
Near-Term GBP/EUR Forecast: 1.1650 Support Remains Crucial
The recovery from Wednesday’s lows has stabilised GBP/EUR, but the pair remains unable to establish a sustained foothold above 1.1700.
The 1.1650 area therefore remains the immediate downside level to watch.
A clear break below this level would expose 1.1600 and potentially the July lows beyond.
On the upside, a recovery through 1.1700 would improve the short-term picture, with 1.1720 and 1.1765 the next resistance areas.
For now, relative interest-rate expectations are likely to remain an important constraint.
Markets continue to price some risk of another Bank of England rate increase, but investors are also becoming increasingly confident that the European Central Bank will tighten further.
With economic data on both sides proving resilient, movements in energy prices, global bond yields and capital flows may prove decisive for the next GBP/EUR move.
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TAGS: Pound Euro Forecasts
