Last week witnessed a retreat of the Pound Sterling, reflecting investor anticipation of the Bank of England signalling an imminent interest rate cut, a move which was subsequently confirmed during Thursday's policy update.
The Bank has articulated its intention to carefully assess the next two wage and inflation releases before determining the suitability of a rate cut in June. Consequently, if Tuesday's crucial wage figures from the ONS indicate a weaker-than-expected outcome, we should anticipate a resurgence of GBP weakness in the days ahead.
As market sentiment increasingly leans towards the likelihood of a June rate cut, GBP/EUR could experience further downside. Currently, market-derived expectations for a June rate cut stand at 45%, leaving considerable room for recalibration that could exert pressure on the exchange rate.
However, should earnings growth surpass the anticipated 5.3% year-on-year figure, we might witness a notable rebound in Pound-Euro towards the 1.17 mark in the near term.
Examining the charts, GBP/EUR finds support just above the 200-day moving average at 1.1618. Furthermore, downward momentum in GBP/EUR has somewhat abated, partly due to Sterling's post-GDP recovery on Friday. These technical signals hint at the emergence of support levels, implying a higher threshold for further weakness going forward.
Already positioned below its 2024 comfort zone, the exchange rate is poised for a potential 'mean reversion' in the upcoming days, contingent upon data releases. However, we do not anticipate the attainment of 2024 highs in the near future, given the market's requirement for convincing evidence that a June rate hike is off the table. Such evidence hinges significantly on forthcoming inflation data.
The impending inflation release in two weeks carries substantial weight, as any shortfall could tilt the probability of a June hike beyond the 50/50 mark, consequently pressuring Sterling as the month draws to a close.
It's crucial to note that the labour market and inflation figures for June will precede the Bank of England's decision, underscoring the pivotal role of forthcoming data in addressing uncertainties surrounding a June hike.
