The Pound-to-Euro Rate in the Week Ahead: Uptrend Gains Renewed Impetus

Image by Jay Allen © Crown Copyright

- Breakout from long-term range now confirmed

- Extension higher likely, towards 200-week MA

- Brexit still main driver for Pound; PMI’s for Euro

The Pound-to-Euro rate is to begin trading around 1.1737 on Sunday after having risen 1.3% in the previous week, although technical signals coming from the charts suggest the exchange rate can rise further during the coming days.

The pair rose after the UK Parliament voted to take ‘no-deal off the table' during a tense week during which lawmakers rejected Prime Minister Theresa May’s deal for a second time. MPs also voted for an extension to Article 50. The week's events pushed the Pound to new 2019 highs against the Euro.

Despite forming what looked like to be a double-top reversal pattern at the highs shown on the 4-hr chart, which had given a technical basis for anticipating declines, fundamental forces were firmly in the driving seat for Sterling. 

GBP/EUR charts now exhibit bullish characteristics, especially on the weekly chart. The rate now definitively broken out of its long-term range, on a weekly closing basis, which is a strong bullish indicator for the outlook.

Following the breakout, the expectation is for the market to now move the same distance as the height of the range (a) above the top of the range (b). The presence of the 200-week moving average at 1.2000, however, places a large obstacle in the way and provides a more achievable target for the pair at 1.1975.

Above: Pound-to-Euro rate shown at weekly intervals.

The R2 monthly pivot - a technical level watched by pros -  at 1.1977 is another obstacle where, as the name suggests, the pair could stop and reverse. However, this is not usually as tough a level to crack as the 200-week moving average.

Confirmation would probably come from a move either above the 1.1801 highs or, more confidently above the R1 pivot at 1.1820. A move above 1.1835-40, for example, would probably be sufficient to signal clearance of the pivot, into open territory above, and up to the aforesaid target at 1.1975.

The one ‘fly in the ointment’ of bullish hopes is the Japanese stick sandwich pattern on daily chart at the recent highs. This is composed of a long green day, followed by a long red day and another long green day, with the two outer green days ‘sandwiching’ the middle day between them. It is a bearish reversal pattern. There is some risk, therefore, of short-term weakness due to the stick sandwich.

This is offset, however, by the bullish 'golden cross' pattern formed after the 50-day MA crossed over the 200-day MA. This is a reliable medium-term bullish signal. The fact this cross was relatively shallow enhanced the signal.

Momentum is relatively robust and supportive of the bullish forecast, especially on the weekly chart, and on the daily, it has fallen from overbought extremes and is ready to start rising again if the uptrend resumes.

Above: Pound-to-Euro rate shown at daily intervals.

The Pound: What to Watch

The main fundamental driver for the Pound in the week ahead is probably developments in the Brexit process, with the Bank of England (BOE) meeting on Thursday also likely to cause volatility.

It is highly likely that the government will try, for the third time, to get its Brexit deal approved by Parliament, or failing that, that the EU will require a lengthy delay of article 50.

The latest reports from Brussels are suggesting the EU may try to make a delay conditional on either the UK having a second referendum, a general election or a very firm plan.

It is suggested this may focus minds, especially amongst Brexiteers who could fear a hijacking of Brexit if there is a delay. This will put pressure on them to accept the government’s negotiated deal.

The two most likely scenarios, therefore, are that Theresa May’s deal finally gets approved on a third attempt, or that Brexit is delayed on the condition of a referendum or general election being held.

Both would be very positive for the Pound, which compliments the overall bullish technical outlook.

The BOE meeting on Thursday, at 12.00 GMT, could also impact on Sterling. There is a risk the BOE may change its statement to reflect the recent slowdown in the economy. If so the Pound is likely to suffer.

Up until now, it had been assumed Brexit risks were the only thing stopping the BOE from raising interest rates, but the slowing economy may be providing them with other reasons not to.

“The economy has no doubt slowed but the Bank seems unwilling to shift to a more dovish stance, reasoning that it should just be patient for now as an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself and hence, kickstart investment and growth. Overall, the BoE is unlikely to deviate much from this stance, but if there is any change, it’ll probably be towards a more cautious bias,” says Raffi Boyadjian, an economist at XM.com.

From a purely hard data perspective, the main releases are employment data out on Tuesday, inflation data out on Wednesday and retail sales on Thursday.

Labour market data is expected to continue showing signs of strength, when released on Tuesday at 9.30. The unemployment claimant count is expected to have risen by only 2.7k in February - a relatively low count - the unemployment rate is forecast to be stuck at a historic low of 4.0% in January, and overall payroll count to have risen by 120k in December, according to consensus estimates.

More important for Sterling, perhaps, is average earnings in January, since this has more influence over Bank of England (BOE) policy.

If average earnings rise more than the 3.4% in January (3.2% including bonuses) that is forecast, inflation will probably rise and so will interest rates - with expectations increasing that the BOE will raise them, and this will drive Sterling higher. Higher interest rates are positive for the Pound because they attract and keep greater inflows of foreign capital.

Inflation is out on Wednesday and is another key metric for the Pound. As explained above inflation influences BOE policy which impacts on the currency. In January inflation came out surprisingly lower after falling -0.8% compared to December. If inflation is also shown to be negative in February it could really drive down the Pound. Current expectations, however, are for a 0.2% rise.

Thursday sees another major data release, in the form of retail sales in February, out at 9.30. This is forecast to show a -0.3% fall from 1.0% previously. A deeper-than-expected decline, however, could trigger more weakness for Sterling.

The Euro: What to Watch

The main release in the week ahead for the Euro is March manufacturing and services sector PMI data, out on Friday at 9.00 GMT.

PMI’s are an important leading indicator which provide a preview of what hard data is likely to show. This is amply illustrated in the chart below which shows how the Eurozone composite PMI closely tracks Eurozone GDP.

PMI’s are surveys of key purchasing managers in companies, who tend to have access to a privileged perspective and are thus able to more accurately gauge the health of the company and industry sector they are in.

Given the slowdown in Eurozone GDP noted in 2018 and the beginning of 2019 investors will be eager to see what the results are for the most recent surveys in March.

Consensus expectations are for the composite PMI index to rise to 52 from 51.9, for manufacturing PMI to rise to 49.5 from 49.3 previously, and for services PMI to fall to 52.7 from 52.8. A result of over 50 indicates expansion and below contraction.

Another key business survey, the ZEW, is out on Tuesday at 10.00, and is forecast to show a dip in Eurozone-wide sentiment to -18.7 in March from -16.6 in the previous month. A deeper-than-expected fall could weigh on the single currency, and vice-versa for a rise.

 

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