The Pound-to-Euro Rate in the Week Ahead: Charts Point Higher but Election Polls Matter Most

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- Charts suggest upside bias for GBP/EUR in week ahead.

- Commerzbank technical analyst eyes move toward 1.18.

- J.P. Morgan eyes move beyond 1.18  level in weeks ahead.

- But election polls set to remain in the driving seat of GBP.

- GBP boosted after Brexit Party step-aside aids Johnson. 

- TV debates followed by manifesto releases set to drive polls.

The Pound-to-Euro rate is likely to build on last week's gains in the coming days, according to technical analysts at J.P. Morgan and Commerzbank, who say the charts favour a continued push higher although many others expect movements in the election polls to remain the dominant driver of price action. 

Pound Sterling held above the 1.16 level against the Euro last week as Prime Minister Boris Johnson was seen improving his chances of securing a parliamentary majority in the December 12 general election, although it's now being tipped to target the 1.18 level in the days ahead.  

"EUR/GBP continues to weigh on the downside. The move below .8571 allows for the slide to extend to the .8465 2019 low. We note the TD support at .8485 and would expect some sort of stabilisation around here," says Karen Jones, head of technical analysis at Commerzbank, referring to the inverse of the Pound-to-Euro rate.

Jones' target of 0.8465 for the EUR/GBP rate implies a Pound-to-Euro exchange rate of 1.1813. She's told Commerzbank clients to buy the Pound-to-Euro rate at 1.1614 if the market pulls back to that level over the coming days. She's not alone in looking for a higher Pound-to-Euro rate either.

"In terms of EUR/GBP we’d only see support for a stronger countertrend rally into 0.9022 and possibly to 0.9149 (Oct. high/int. 76.4 %), once the first crucial resistance zone between 0.8743 and 0.8786 (minor 38.2 %/pivot) would be taken out. Below, this market remains in negative territory and ready to head for lower targets," says Thomas Anthonj, a strategist at J.P. Morgan.

Above: Pound-to-Euro rate shown at hourly intervals, alongside EUR/GBP rate (blue line, left axis).

Anthonj says the Pound-to-Euro rate will retain an upside bias the entire time it's above the 1.1437 level and has told J.P. Morgan clients that Sterling will likely reach 1.1764 over the coming days, before targeting a further move up to 1.2165 in the weeks and months ahead. 

The Pound was undeterred from its upward grind last week even after retail sales and inflation figures emerged on the soft side for the month of October, with the seemingly improving prospect of a Conservative Party victory in the December 12 general election being behind Sterling's resilience. 

Brexit Party candidates were stood down in more parliamentary seats across the country on Friday as part of an effort to boost Prime Minister Boris Johnson's election chances by not splitting the 'leave vote' in areas where the Conservatives have better chances of winning or already hold seats. The decision came after the newly formed party stood down more than 300 candidates the week before so as not to impede Johnson's chances. 

"The slew of data in the UK this week failed to drive any move in sterling as markets continue to focus solely on the upcoming general election.," says Chris Turner, head of FX strategy at ING. "The first television debate between Mr Johnson and the Labour leader, Jeremy Corbyn, will be the highlight of the week. The general perception of who comes out as the “winner” may affect some markets expectations, although more opinion polls are probably going to be the major driver of the pound."

Above: Pound-to-Euro rate shown at daily intervals, alongside EUR/GBP rate (blue line, left axis).


Pound Sterling: What to Watch

Ebbing and flowing polling numbers are to remain the single greatest influence on the Pound over the coming days with economic data lonce again taking a back seat. This means the first televised leadership debate due on Tuesday will be an important moment for the Pound. 

Prime Minister Johnson will go head-to-head with opposition Labour Party leader Jeremy Corbyn in a televised debate Tuesday and with neither party's manifesto expected before the weekend, it's likely that talk of rival visions for a post-Brexit UK will dominate the discussion. Investors and analysts will be looking to see Johnson emerge from the debate without his polling lead, which some firms estimate to be as high as 12%, intact.

A Conservative Party majority would enable the Prime Minister to take the UK out of the EU with an agreement that averts a 'no deal' Brexit and provides businesses with some kind of certainty about the country's trade arrangements over the coming years. That would also keep the opposition Labour Party and its controversial policy agenda from the doors of 10 Downing Street and possibly even slow the decline in business investment that's been ongoing since the referendum.

"EUR/GBP has been gradually grinding lower over the past week. The pound’s outperformance primarily reflects building optimism that the Tories will win a majority at the upcoming election," says Derek Halpenny, head of research, global markets EMEA & international securities at MUFG. "The gap though between the Tories and Labour would have to narrow materially to create more election uncertainty and weaken the pound. Market optimism over a potential end to the Brexit deadlock in parliament has allowed the pound to weather the softening UK economic data flow over the past week."

Retail sales fell by 0.1% in October, Office for National Statistics data revealed, when markets were looking for them the rise. Falling sales volumes on the high street in October could mean the economy saw a slow start to the final quarter. Meanwhile, other figures showed UK inflation pressures in retreat last month, providing the Bank of England (BoE) with time to sit on its hands and observe developments in the Brexit process. 

CBI Industrial Order Expectations figures are out on Tuesday at 11:00 and the latest public sector net borrowing numbers will be out on Thursday at 0930, although investors will likely be more focused on Westminster. 


The Euro: What to Watch 

Currency traders will be looking toward the Federal Reserve (Fed) and European Central Bank (ECB) monetary policy meeting minutes for clues on the relative interest rate outlook this week, while November's manufacturing and services PMI surveys will provide an update on the growth outlook. 

Minutes of the October ECB meeting will be released at 1230 Thursday although they're unlikely to have much market impact because they relate to former President Mario Draghi's last meeting and the bank is now the charge of Christine Lagarde. However, a Friday speech by Lagarde to the European Banking Conference, expected around 0800, is likely to garner more attention.  

"Christine Lagarde’s ECB is not about to suddenly pivot away from the course set by Mario Draghi over the summer. In the absence of an external shock, the most likely scenario is that Lagarde sticks to the status quo at the December press conference and any serious discussion about how monetary policy evolves won’t be taking place until the press conference in March at the earliest," says Marchel Alexandrovich, an economist at Jefferies.

Arguably the most important release for the Euro in the week ahead will be the IHS Markit PMI surveys due out between 0815 and 1000 on Friday. Both the manufacturing and services barometers rose by a fraction last month and markets are looking for them to do so again in November. Continued gains in the PMIs might be taken by markets as further evidence that the downturn in the Eurozone industrial sector is coming to an end, which might help put a floor under the single currency. 

"The German national accounts now paint a picture of a start-stop economy. Germany teetered on the brink of recession in H2 2018, and then rebounded strongly in the first quarter of 2019, but has since stalled," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, "Italy and Germany are still the key laggards among the major economies, in contrast to still-decent growth in Spain and France."

Rising PMI numbers would be consistent with the message given off by Germany's ZEW survey for November, which showed financial market analysts becoming more optimistic about the outlook for growth.

That was attributed by respondents in the survey to the Brexit agreement struck by Prime Minister Boris Johnson in October and reports suggesting President Donald Trump is unlikely to impose tariffs on imports of cars from Europe, but it also followed other data that suggested the German and Eurozone economies didn't slow as much during the third quarter as was previously thought.

"We certainly believe the change in data flow, while not yet compelling and certainly from a low base will be enough to curtail euro selling. However, price action in recent weeks points to the euro as a funding currency and that of course will not change. So at this juncture we are more inclined to point toward EUR stability based on better incoming economic data rather than any notable turn higher," says MUFG's Halpenny.

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