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Pound-to-Euro Exchange Rate Week Ahead Forecast: Break Above 1.1080 Opens Door to Further Gains

Pound Sterling week ahead

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- Pound Sterling in short-term recovery

- Breaks of key level could signal further rises

- Pound to be driven by Brexit speculation; Euro by CPI data

The GBP/EUR exchange rate is trading at around 1.1019 at the start of the new week after rising a solid 0.7% in the week before, ensuring a second consecutive week of gains for Pound Sterling.

The gains confirm growing technical evidence of a potential reversal in the multi-month downtrend.

The 4-hour chart - used to determine the short-term outlook, which means the coming week or next 5 days - shows how the pair has been rising in a step sequence higher ever since the August 11 lows.

Four hour chart

The pair has reached resistance from a trendline and pulled-back lower, but if it breaks above the 1.1080 highs that will provide confirmation of a breakout above the trendline and more upside, potentially to an upside target of 1.1240 - the July 25 highs.

The pair may have formed a price pattern at the lows called an inverse head and shoulders (H&S), which is a bullish reversal pattern.

This normally indicates a move up of an equal height as the pattern extrapolated higher (labeled X on the chart). This roughly corresponds with the 1.1240 target.

Meanwhile, the daily chart shows how a break above the trendline could lead to a possible eventual medium-term upside move up to a target at 1.1320 and the 200-day moving average (MA). Large MAs often act as tough support or resistance levels where prices are apt to hit a ‘brick wall’.

Daily GBPEUR chart

For confirmation of such a move, we would ideally want a break above 1.1080.

Momentum is strong, as measured by the RSI indicator, and is higher than it was when the market was trading in the 1.12s at the end of July, which is a bullish sign.

The daily chart is used to analyse the medium-term trend, which is the next week to a month of price action.

The weekly chart - used to analyse the long-term trend, defined as the next several months of market action - shows increasing evidence that the pair may have formed a bottom and is starting a new trend higher.

GBP EUR weekly chart

The pair has formed what is known as a 2-bar reversal pattern composed of a long red down bar followed by a long green up bar, which more or less reverses all the previous period’s losses.

This has now also been followed by another green up-bar which reinforces the signal from the 2-bar reversal pattern.

Another bullish sign is that the RSI momentum indicator has just exited the oversold region giving a ‘buy’ signal.

In the long-term, we see a probable move up to the middle of the range and the 1.1320 level where the 50-week MA is situated.

At that point, the pair will probably pause and pull-back down entering a consolidation period before potentially more upside towards the range highs.

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The Pound: What to Watch

UK flag

The main driver for the Pound in the week ahead is likely to further speculation over Brexit and we will be looking for an improved atmosphere between the UK and EU to aid further gains.

Over the weekend Prime Minister Boris Johnson said at the G7 Summit in France that a ‘no-deal’ Brexit remained a “touch and go” prospect, but he expressed satisfaction that European leaders appear increasingly willing to talk.

Pound best performer

Above: Sterling was the best-performing major currency last week

Sterling rallied last week as EU leaders sounded a decidedly more constructive tone on looking for a way around the impasse posed by the Northern Irish border question: Johnson wants the Irish border 'backstop' completely removed from the existing Brexit deal, while EU leaders have previously said the issue was not up for negotiation.

Germany's Chancellor Angela Merkel and France's President Emmanuel Macron last week suggested there was 30 days for the UK to come back with realistic alternatives to the backstop that would ensure the border stays open.

“We can find a solution to the backstop by October 31…we can work on finding a regime that keeps the Good Friday Agreement and also ensures the integrity of the single market,” said Merkel at an event in the Hague.

Macron's suggestion that the backstop can be tweaked is however arguably the more important communication of the day as it would appear to be the first time an EU leader has deviated from the long-held line that the Withdrawal Agreement cannot be reopened.

"It is just what Michel Barnier has negotiated can be amended while complying with the integrity of the single market and the two goals I mentioned, then we can find a solution," Macron said during a visit by UK Prime Minister Boris Johnson to Paris.

The risks of a ‘no deal’ have increased since Prime Minister Boris Johnson came into power and there will remain uncertainty as to whether the UK can present proposals acceptable to the EU, which should keep any advances in Sterling limited.

"Personally I don't see the the recent Sterling optimism regarding the backstop, clearly the market is just reducing shorts & unwinding hedges. Solid longer term interest we estimate will remain on the sell side. I suggest the market reassessing the content of Boris Merkel & Macron backstop comments this week," says Neil Jones, a currency trader at Mizuho Bank in London.

There is an added risk Boris Johnson may call a general election in the coming weeks in order to increase his majority so he has more power to enforce a Brexit on his terms.

His recent spending pledges were seen as paving the way for such an event.

Calling an election would likely keep the pressure on Sterling as the currency tends to underperform heading into General Elections owing to heightened uncertainty.

The Euro: What to Watch

EU flag

The main release for the Euro in the week ahead is likely to be inflation data out on Friday.

Eurozone core inflation is forecast to show a rise to 1.0% from 0.9% in August whilst broad inflation is forecast to remain unchanged at 1.0%, when released at 10.00 BST on Friday.

Inflation impacts on the Euro via interest rates which rise or fall in tandem with inflation. The Euro is closely correlated to interest rates because of the impact they have on capital flows. When they are high they lead to higher capital flows and vice versa when they are low.

“Attracting more attention will probably be Friday’s flash CPI stats for the Eurozone as a whole. Inflationary pressures have cooled in recent months as the economy slowed, and inflation expectations have also declined dramatically, threatening to drag actual inflation even lower. That is why investors expect the European Central Bank to act with force in September and cut rates deeper into negative territory, as well as launch another round of Quantitative Easing,” says Marios Hadjikyriakos, an investment analyst at XM.com who concludes the outlook does not bode well for the single currency.

The other key release is Eurozone unemployment in July, which is forecast to come out at 7.5% when it is released at the same time as inflation data.

German data may also be of interest. The Ifo Business climate index came out below expectations when it was released this morning. It is seen as a fairly reliable indicator of growth, suggesting the possibility of slower growth as possible a recession in Europe’s largest economy.

Consumer Confidence on Wednesday and German CPI out on Thursday may also be of interest, with the former expected to show a drop to 9.6 and the latter a slowdown of -0.1% in inflation in August.

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