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The Pound-Euro Week Ahead: Resistance Looms On Charts as Sentiment, Economic Data Set Direction

- GBP/EUR reaches inflection point amid July recovery rally. 
- As 55-day moving-average at 1.12 guards path back to 1.15.
- Investor sentiment, earnings & UK data in GBP's driving seat.
- Time on clock sees Brexit talks fade into background for GBP.

 

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The Pound-to-Euro exchange rate has corrected higher in July although the coming week will determine if this move is simply a rebound from oversold levels or the beginning of a more protracted turn higher that endures for longer. 

Pound Sterling was the second best performing major currency last week after remaining deaf to the Brexit trade talks and preferring instead to take cues from the investors' glass-half-full view of the global economic outlook, which has enabled it to become an outperformer in early July. 

The Pound has turned higher off its late June lows near 1.09 to be left testing its 55-day moving average just shy of 1.12 on Friday, and whether it overcomes this level in the coming days will help determine the outlook through month-end. 

"EUR/GBP’s slip off its .9178 June high has taken it close to the 55 day moving average and the June low at .8924/.8864. This area we expect to underpin. Should this not be the case, the 200 day moving average at .8708 would be back in sight," says Axel Rudolph, a senior technical analyst at Commerzbank

A daily close above the nearby 55-day moving-average this week would open the door for a challenge of the larger and more significant 200-day average near to 1.15, whereas failure to sustain a move above there could be a harbinger of a subsequent return back toward late June lows beneath 1.10 as far as the technical picture goes. Rudolph and the Commerzbank team look for failure at 1.1199 and a drift lower toward 1.05 in the coming months.

Above: Pound-to-Euro rate at daily intervals with S&P 500 (orange) and  21, 55 (red) & 200-day (green) moving-averages. 

"Serious divergences" remained between the two sides in the Brexit trade talks last week but Sterling still closed higher against all major rivals other than Sweden's Krona in another demonstration of the Pound 's newfound desensitisation to developments in the long-running saga. 

"Though a UK/EU-27 FTA covering a range of goods is likely by year-end, the UK’s trade policies will be in flux beyond 2020. What 2020 will do is create a starting point for UK/EU-27 trade adjustments going forward; regulatory alignment, dispute arbitration and trade friction are likely to crop up as issues over the medium-term," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "We would be inclined to fade GBP strength vs the EUR on a move back to 0.8650 [GBP/EUR: 1.1560]."

Accelerated talks continue until the end of July and even then the two sides will still have until year-end to either reach agreement on preferential trade terms or extend the Brexit transition into 2021.

In addition, the Pound has already fallen substantially against all majors this year and still remained among the worst performers of 2020 on Friday.

This could mean for the time being at least that Sterling will continue to overlook whatever statements emerge from negotiators and political leaders on each side, continuing instead to take cues from the developing economic picture as well as the investor sentiment that's reflected by the stock markets. 

"Johnson had made a solemn promise before that the UK would leave the EU at the end of October last year. Almost at the last second, he then requested that the date of withdrawal be postponed until the end of January after all. It is therefore not unreasonable to assume that the government merely wants to exert pressure on the EU, but would finally give in again if no agreement were to be reached," says Thu Lan Nguyen, a Commerzbank colleague of Rudolph's. "Volatility is likely to increase particularly towards the end of the year when the UK is due to actually leave the EU single market."

Above: Pound-to-Euro rate at weekly intervals with  21, 55 (red) & 200-week (green) moving-averages. 

Stock markets and other risk assets, including some currencies like Sterling, have defied gravity in recent months as investors have bet that economies would rebound swiftly from this year's historic economic standstill brought on by the coronavirus. This week investors will find out whether they were right to.

"We don’t expect any progress in the Brexit talks next week or over the summer as a whole, meaning that positive catalysts for GBP upside should be rather scarce," says Petr Krpata, chief EMEA strategist for FX and bonds at ING. "The market will closely watch out for any guidance provided by US banks as earnings season gets into gear on Tuesday. Any significantly higher provisioning for souring loans or a lowering in guidance (although only 49 of the S&P 500 companies currently provide guidance!) stand to insert more equity volatility into the equation." 

May and June are believed to have marked the beginning of a recovery for major economies that experienced their first full month of lockdown in April, so this week's May GDP data from the UK and second quarter corporate earnings data from the U.S. will have implications for the Pound and other currencies. 

In turn, the response seen in stock markets and Sterling will determine whether the Pound-to-Euro rate correction higher fails at the 55-day moving-average near 1.12, or if it endures or if it puts a move up to 1.15 in the pipeline.  

"With record low visibility on earnings across the S&P 500 through Q1, earnings estimates and guidance provided across US banks and non-financial corporates carry weight for risk sentiment. In particular, US banks’ perceptions of the economy will provide insight into the flow of credit, NPLs and the growth trajectory. Narrow price ranges across FX, high-yield debt and equities suggest elevated uncertainty over the next move, while the deteriorating pandemic news, fiscal stimulus and economic data add to the probability of a downside break in risk assets," warns Daniel Been, head of FX research at ANZ.

Tuesday at 07:00 marks the release of May GDP data and consensus is looking for a 5% rebound to follow April's -20.4% decline in what was the UK's second month of full 'lockdown'. At the same time on Thursday, investors will be looking to see if any of the estimated 1.5 million new welfare claims to have been made since the national shutdown began in March begin to show up in the official unemployment rate, which has fallen from 4% to 3.9% since March. 

A faster than anticipated economic rebound in May might further dispel some of the gloom around Sterling and enable a continued rebound in the Pound-to-Euro rate but in the absence of a declaration of progress toward a trade agreement in the Brexit talks, the Pound's recovery rally could prove to be short-lived.

In the event that progress is made in the trade talks, the Pound-to-Euro rate could find itself on route to 1.17 or above.

 

 


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