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Pound-to-Euro Rate Week Ahead Forecast: New Uptrend Likely Extend but Week of Explosive Parliamentary Politics Promises Volatility

Parliament and the Pound

Image © Photocreo Bednarek, Adobe Stock

- Pound Sterling recovers back into established range

- Extension higher now increasingly possible

- Pound to be driven by Brexit developments; Euro by German data

The GBP/EUR exchange rate is trading at around 1.1067 at the start of the new week, having registered a 0.37% advance last week.

Sterling has now recorded its third consecutive week of gains against the Euro, and our technical studies of the charts suggest the exchange rate can extend higher in the short-term.

However, we warn from the outset that this week should be a politically explosive one as parliament returns and the House of Commons attempts to block a 'no deal' Brexit. We therefore expect heightened headline-driven volatility in Sterling exchange rates.

The technical outlook is however a positive one short-term. 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 risen from the August 11 lows, broken back inside its long-term range and then started going sideways.

Four hour GBPEUR

The pair has formed a ‘box’ price pattern most recently out of which it will probably break eventually in line with the prior uptrend.

A break above the 1.1100 level just above the top of the box will confirm a breakout to a target at 1.1200, which is roughly the same height as the box extrapolated higher, the usual method for calculating upside targets.

The daily chart shows a similar picture only on a higher timeframe.

Daily GBPEUR

A key thing to note is that the pair is currently trading at around the same level as the 50-day moving average (MA). Major MAs often act as tough support or resistance levels - in this case resistance.

A break above the highs of the box and the 1.1100 level, however, would likely signal the MA had been breached and the pair was going higher, and such a move would probably rise up to a target at 1.1310.

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

The weekly chart - used to analyse the long-term trend, defined as the next several months of market action - suggests the pair has formed a plausible bottom.

Weekly GBPEUR

It has completed 3 up-weeks in a row and also broken back inside the long-term range. This is a bullish sign and suggests it will probably rise further to a target at 1.1310 and then possibly even higher eventually.

Another bullish sign is that the RSI momentum indicator has exited the oversold region giving a ‘buy’ signal. It has risen quite strongly further suggesting more upside on the horizon.

After reaching the early 1.13s the pair could very well pause and pull-back. After that, however, it will probably continue higher to a target at 1.1600 and the top of the range.

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The Pound: Political Fireworks

 UK flag

September 03 sees the UK parliament sit once more, and the return of MPs should herald what is potentially going to be the most explosive week of parliamentary politics of our generation.

We fully expect Sterling to react to developments in parliament, and therefore warn readers that volatility is likely to be elevated.

MPs return to a shortened parliamentary session owing to the decision by Prime Minister Boris Johnson to suspend parliament from September 12 to October 14. The move has galvanised those MPs in the House opposed to Brexit into accelerating the passing of legislation designed to frustrate the Prime Minister and remove the option of a 'no deal' Brexit taking place on October 31.

Reports out late last week suggest MPs have agreed the form of legislation they would want to present.

If markets deem the legislation as having the potential to pass, and block a 'no deal' then there is a decent chance Sterling can extend higher.

However, we are of the firm belief that the best possible outcome for those wanting a stronger Pound would be for a Brexit deal to be struck. We believe that removing 'no deal' from the equation lessens the incentive for European negotiators to offer the substantive changes on the Northern Irish border backstop that Johnson is seeking.

It also materially lessens the incentive for MPs in the House to vote for a deal.

Johnson is looking to strike a fresh agreement with the EU and see it passing through the House on the back of the votes of MPs who have no option but to vote for a deal if they want to avoid a 'no deal' outcome.

Keep in mind that it is also possible opposition leader Jeremy Corbyn calls a vote of no-confidence when parliament.

A vote of no confidence has a fairly good chance of being successful given the large number of rebel Conservative MPs who are against a hard Brexit.

Press reports out on the weekend suggests Johnson will look for those MPs who vote against the government to be expelled from the party. This could shrink the scale of the Conservative rebellion against him.

It could however free up a number of MPs to vote against their ex-leader.

We view a no-confidence vote as offering up fresh uncertainty, and therefore potential downside for Sterling.

However, highlighting just how difficult it is to judge the landscape, some analyst believe a no-confidence vote could in fact be good for the Pound.

“If we have that vote of no confidence, whilst it is uncertain what the outcome would be, the Pound would go up on that headline alone. So that is why I think there is a shimmer of hope for a tactical long trade,” says Jordan Rochester, an analyst at Nomura.

There is a risk the Pound could also gain a boost from a legal challenge mounted by the anti-Brexit campaigner Gina Miller, who is attempting to prevent the proroguing of Parliament in the high courts.

Miller's argument is that a proroguing of this length of time is unprecedented. That the Queen was ill-advised and that it is unlawful as it was undertaken precisely to prevent parliament from doing its job of scrutinising the executive.

Opponents claim parliament typically does not sit at this time of year anyway, to allow for party conferences and that it is not within the remit of the courts, as it is a solely political matter.

“The Johnson hijackers are saying that the prorogation of parliament ahead of a Queen’s speech is what always happens – and that it is no more than a normal convention and precedent in our unwritten constitution. But there is no convention or precedent for a five-week prorogation. In the last 40 years, parliament has never been prorogued for longer than three weeks. In most cases it has been prorogued for only a week or less, for example for 3 days in 2015, 5 days in 2016 and 6 days in 2017,” says Miller.

The court hearing for Miller’s case has been set for Thursday, September 5. If she is successful Sterling will almost certainly rally.

On the economic data front, the main releases are manufacturing, construction and services PMI data on Monday, Tuesday and Wednesday respectively.

These could impact the Pound since PMI’s are seen as fairly reliable leading indicators of economic growth, and a better-than-expected result is likely to lead to a rise in Sterling, whilst vice versa for a lower-than-forecast result.

Manufacturing PMI for August is forecast to show a rise to 48.4 from 48.0 when it is released on Monday at 9.30 BST.

Construction PMI is expected to show a rise to 45.5 from 45.3 when it is released on Tuesday at 9.30.

Services PMI is estimated to have fallen to 51.4 in August from 51.0 previously when it is released at the same time on Wednesday.

 

The Euro: What to Watch

Euro

The main drivers of the Euro in the week ahead are likely to be Eurozone retail sales on Thursday, German data at the end of the week and continued speculation about what the European Central Bank (ECB) is likely to do at its next meeting on September 13, when it is widely expected to begin a new programme of quantitative easing (QE).

The data will be important in the context of the slowdown the Eurozone is currently experiencing, in particular Germany.

Retail sales in July is forecast to show a fall of -0.6% from 1.1% previously when it is released on Thursday at 10.00 BST.

A higher-than-expected reading should be taken as positive for the Euro, while a lower than expected reading should be taken as negative for the Euro.

German data at the end of the week is likely to either stoke or ease existing fears concerning Europe’s biggest economy.

German factory orders in July are forecast to show a -1.5% fall after a 2.5% rise in the previous month when released on Thursday at 7.00 BST.

German industrial production in July is forecast to show a rise of 0.1% from -1.5% previously when released on Friday at the same time.

Any divergence from these forecasts could impact on the Euro. Germany has already shown one-quarter of negative growth and if it shows another quarter of negative growth it will fit the definition of a technical recession. This is likely to have a negative impact on the single currency.

In relation to the ECB meeting, the expectation is that the central bank will announce policy support to help stimulate growth in the region. This will probably come in the form of a QE programme.

The ECB is less likely to cut interest rates as these are already very lows and if they are cut any lower they will put more pressure on already struggling Eurozone banks, which would be self-defeating.

“The euro has been drifting lower in the past week and is on track to revisit its 2019 low of $1.1025 in anticipation of a major stimulus announcement by the ECB later in September,” says Raffi Boyadijian, an investment analyst at FX broker XM.com.

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