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British Pound vs. Euro Week Ahead Forecast: Further Upside Conditional Upon Technical Breakout, UN General Assembly Eyed for Brexit Progress

Pound sterling news

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- GBP/EUR hits chart ceiling and pulls back

- More upside dependent on break above highs

- Johnson to meet EU leaders on side of UN General Assembly

- Euro could be driven by PMIs

Pound Sterling's uptrend against the Euro remains intact from a short-term perspective, after the GBP/EUR exchange rate Prose 0.26% in the previous week.

The pair starts off the new week 1.1331, having pared gains from a multi-month best at 1.1380: the Pound has enjoyed a solid run of six successive weeks of gains against its Eurozone partner.

Despite the solid momentum, our technical studies of the charts indicate that in the near-term there is a chance the pair will go sideways with further upside being conditional on a break above last week’s highs.

The 4 hour chart - used to determine the short-term outlook, which means the coming week or next 5 days - shows the pair in a steady uptrend which has pulled-back after touching tough resistance in the early 1.13s.

Four hour GBPEUR

There is an old adage that ‘the trend is your friend’ and this suggests the possibility that the pair could break higher but we would first need confirmation from a move above the 1.1381 highs.

But if the pair fails to break higher it could very well trade in a sideways range instead.

The fact the RSI momentum indicator in the lower pane of the chart has been declining at the same time price has been rising - something known as ‘divergence’ in technical analysis - is evidence the rally may have lost ‘punch’ and the pair could be about to go sideways.

The daily chart meanwhile shows how the pair has risen up to resistance from the 200-day MA at 1.1320 and pulled-back, forming a negative candlestick.

Daily GBPEUR

Like the 4hr chart, there is a possibility that the pair could go higher if it can successfully break above the September 20 highs.

Such a move could carry it up to a target at 1.1600 in the medium-term - the top of a multi-year range.

Yet the combination of the ceiling provided by the major MA as well as the RSI momentum indicator which is flirting with the overbought zone above 70, suggests evidence of the possibility of a pull-back and the start of a corrective phase.

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

The weekly chart tells a similar story to the daily only with the 50-week MA acting as the resistance level preventing further upside.

Weekly GBPEUR

If the pair can break above last week’s highs it could confirm a continuation potentially up to a target at 1.1600 and the top of the long-term range.

The RSI momentum indicator is rising quite steeply, supporting the likelihood of more upside.

The top of the range, however, is likely to present a tough obstacle to more upside and there is an increased chance the pair could pull-back from that level and range-trade for a while.

The weekly chart is used to analyse the long-term trend, defined as the next several months of market action.

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The Pound: Key Events this Week

Pound sterling

The main focus for markets will be ongoing progress towards a Brexit deal between the UK and EU after what appeared to be some breakthroughs last week, and an improvement in the negotiation ‘mood music’ around Brexit.

On Thursday, European Commission president Jean Claude Juncker said, “we can do a deal” in an interview with Sky News, encapsulating the mood of optimism.

His comments on the Northern Ireland backstop are however perhaps the most notable in that he suggests he is open to dropping the clause that has proven to be the most problematic element of the existing Brexit Withdrawal Agreement for the UK side.

Juncker said a 'no deal' Brexit would have "catastrophic consequences" and said he was doing "everything to get a deal".

He said did not have "an erotic relation" Northern Ireland backstop, adding he was prepared to remove from a withdrawal agreement, so long as "alternative arrangements [are put in place] allowing us and Britain to achieve the main objectives of the backstop. All of them".

Prime Minister Boris Johnson aims to spell out further details surrounding the UK's proposals at the UN General Assembly, to be held in New York from Tuesday September 24.

Johnson will reportedly speak to Donald Tusk, the President of the European Council, as well as French, German and other EU leaders on the sidelines of the UN General Assembly in New York.

Analysts at Moneycorp, a currency broker based in London, say a potential resolution to the Irish border question could go a long way to calming investors’ fears over a 'no deal' Brexit:

"The Pound is continuing its recovery against the Euro, following reports that Prime Minister Boris Johnson will reveal an alternative solution to the Irish border issue at the UN next week. GBP/EUR reached a three-month high in reaction of ongoing progress."

Another key event will be the decision of the Supreme Court over whether it was lawful for Johnson to prorogue Parliament. This is likely to come at the start of the week according to the presiding judge Lady Hale.

The impact on the Pound is likely to be volatile but probably short-lived: if the decision is that Parliament was unlawfully shut-down and MP’s are able to return it will make it easier for them to stymie a ‘no-deal’ Brexit, which could give Sterling some further support.

The Pound's rally since mid-August has largely been built on a reassessment by the market that a 'no deal' Brexit had become increasingly unlikely owning to the decision by Parliament to effectively outlaw such an outcome.

If the decision goes the other way, the Pound may weaken as it will give the government the upper hand, as well as setting a legal president.

However, it is arguable that Parliament has already achieved its objectives in tying the Prime Minister's hands on the issue of 'no deal' therefore we would expect the impact to ultimately be limited.

Meetings also appeared to go well between the UK’s brexit minister Stephen Barclay and EU chief negotiator Michel Barnier.

Barclay said they had had "serious detailed discussions" and things were "moving forward with momentum", whilst Barnier commented that “it had been a "cordial" meeting, but "lots of work has to be done in the next few days", according to reports from the BBC.

Others were more sceptical: the prime minister Boris Johnson said that whilst there had been “progress” it was important not to “over-exaggerate”.

Irish foreign minister Simon Coveney said there was a "wide gap" between the UK and the EU, with Brussels "still waiting for serious proposals" from London.

Leaked comments from Brussels concerning the UK’s proposals suggested a gulf remained between the two, after a memo from the European Commission confirmed British proposals for replacing the Irish backstop "do not amount to legally operational solutions and would have to be developed during the transitional period".

Clearly, if there is more progress on a deal it will be beneficial to the Pound.

 

The Euro: PMIs in Focus

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The main release for the Euro in the week ahead is likely to be PMI activity data for the manufacturing and services sectors of the European economy.

PMIs are surveys of pivotal purchasing managers in companies which are considered good early warning indicators of wider economic growth.

Manufacturing PMI is expected to show a rise to 47.3 in September from 47.0 previously, when data is released at 9.00 BST on Monday.

Services PMI is forecast to show a fall to 53.3. From 53.6 at the same time.

The composite PMI is expected to remain unchanged at 51.9.

If the PMI results are higher-than-expected it is normally positive for the Euro and vice versa if lower-than-expected.

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