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Pound to Euro Week Ahead Forecast: Unto Technical and Global Headwinds

  • GBP/EUR stalled by resistance near 1.1667 on charts
  • 100-day average at 1.1603 offering support short-term
  • Consolidation in narrow 1.1607-1.1658 range possible 
  • Sparse UK calendar puts global factors in driving seat
  • European CPI, data, Fedspeak & USD trend pose risk

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The Pound to Euro exchange rate entered the new week near to November highs with technical resistance located near 1.1667.

Sterling rose broadly in what was a buoyant market for risky assets and a hostile environment for the U.S. Dollar last week but it was unable to rise above 1.1667 against the Euro, which coincides closely with the 78.6% Fibonacci retracement of GBP/EUR's late August downtrend. 

Technical resistance around that level previously halted the Pound's October recovery from the lows reached following September's budget event and could be likely to scupper any attempted advance again this week as a sparse UK economic calendar leaves international factors in the driving seat for Sterling. 

"The current account deficit likely will remain extremely large this winter and throughout 2023, leaving sterling vulnerable to any financial shock that spurs risk aversion, even if it has little to do with Britain," writes Samuel Tombs, chief UK economist at Pantheon Macroeconomics, in a Monday research briefing. 

"Our view that the MPC will stop hiking Bank Rate once it has increased it to 4%—65bp below the peak currently priced-in by investors—points to scope for a renewed depreciation on sterling," he adds after tipping the Pound for a fall back toward 1.10 against the Euro in the months ahead.


Above: GBP/EUR at daily intervals with Fibonacci retracements of late August decline indicating possible areas of technical resistance for Sterling. Selected moving-averages denote possible areas of support and resistance. Click image for closer inspection.


Declines in U.S. exchange rates and gains for risky assets like stocks helped GBP/EUR to climb from around 1.15 to 1.1667 last week but international factors are unlikely to provide any more support for Sterling this week than could be expected from the grim and gloomy UK economic backdrop. 

This is partly because of developments in China over the weekend where fresh unrest over the latest round of coronavirus-related restrictions is likely to keep financial markets focused on the heavy economic costs of the government's continuing attempts to contain the virus. 

"Weakness in commodities is being blamed on China’s Covid situation. Record daily case numbers are occurring alongside numerous localised lockdowns and then over the past weekend, wide coverage in non-Chinese media of public protests," says Sean Callow, a senior FX strategist at Westpac. 

Financial markets had recently celebrated speculative rumours about the prospect of coronavirus-containment measures being abandoned in China so could be reactive to the continued spread of restrictions over the coming days with adverse implications for Sterling.


Above: Pound to Euro rate shown at daily intervals with Fibonacci retracements of late August decline indicating possible areas of technical resistance for Sterling. Selected moving-averages denote possible areas of support and resistance. 

 

The Pound to Euro exchange rate could find support near to its 100-day moving-average around 1.1603 in those circumstances, although much will also depend this week on the market response to Wednesday's inflation figures from the Eurozone and on how other events impact the U.S. Dollar. 

"An upside surprise to the November CPI data can lift expectations for a 75bp hike in December and support EUR. Conversely, a below consensus print can weigh on EUR if market pricing unwinds," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

"ECB President Christine Lagarde speaks to the European Parliament’s Committee on Economic and Monetary Affairs on Tuesday. President Lagarde’s comments can also impact EUR if her comments see market pricing firm in either direction," Capurso says.

Most notably this Wednesday will see Federal Reserve (Fed) Chairman Jerome Powell speak about "the economic outlook, inflation, and the labor market" at the Brooking Institution just after the initial estimate of U.S. GDP is released for the third quarter and ahead of November's payrolls report on Friday. 


Above: GBP/EUR shown at weekly intervals with Fibonacci retracements of late August decline indicating possible areas of technical resistance for Sterling. Selected moving-averages denote possible areas of support and resistance. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here. 


"He is expected to push back against a premature easing of financial  conditions by reiterating that rates are likely to rise to a higher level than previously expected. The Fed’s policy plans remain heavily  dependent on incoming economic data," says Lee Hardman, a currency analyst at MUFG.

Dollar strength and risk aversion on global markets would likely result in losses for GBP/EUR later this week if Chairman Powell's speech reverses the recent declines in U.S. bond yields or if it leads the financial markets more broadly to fear for the U.S. and global economic outlooks. 

The author's own model suggests the Pound to Euro rate will most likely trade between roughly 1.1607 and 1.1658 throughout the week ahead, however, suggesting Sterling is likely to leave the Fibonacci level at 1.1667 and its 100-day average at 1.1603 intact over the coming days.

The model uses individual currencies' sensitivities to the U.S. Dollar and a process of cross-currency triangulation to estimate where non-Dollar exchange rates would be likely to trade as the Dollar itself rises and falls.


Above: Pound to Euro rate shown at weekly intervals with Fibonacci retracements of late August decline indicating possible areas of technical resistance for Sterling. Selected moving-averages denote possible areas of support and resistance.