British Pound Forecast to Hit Multi-Month Best Against Euro Over Coming Days

Our studies confirm the recovery in the GBP/EUR exchange rate is likely to extend further with a positive data release at the start of the new week giving the call some credibility.

• GBP in strong start to the week thanks to better-than-forecast services data
• Pound to Euro exchange rate today: 1.1962 - the best exchange rate in 4 weeks
• Euro to Pound Sterling exchange rate today: 0.8391

Pound Sterling was the best performing currency in the G10 complex for the week ending 2nd of August as more traders continue to take profit on their negative bets agaisnt the currency.

The GBP to EUR conversion has moved been recovering since mid-August as markets are forced to accept the data coming out of the UK economy is better than they had anticipated.

"Sterling bears got a proper end-of summer hiding this week. In the Pound's case, good data played a major part with huge upside surprises to the Manufacturing and Construction PMI figures for August," says Kit Juckes at Societe Generale.

Juckes notes, "it's clear that the initial slide in the UK survey data exaggerated the effect of the referendum vote and even if the bounce tells us little about the future outlook, positioning has suffered."

Whilst still in a broad down-trend, GBP/EUR is now showing signs of reversal, and we are close to a level where the trend could quickly flip higher.

GBP/EUR has now reached 1.1918, it has broken clearly above the 50-day moving average, and looks set to continue its short-term up-trend.

The pair can be seen to have formed a double bottom reversal pattern at the lows:

These patterns are formed when two market troughs happen adjacent to each other at roughly the same level.

They mark a market bottom and forecast a reversal in the asset if the exchange rate can provide confirmatory evidence by breaking above the ‘neckline’: the level of the intervening peak between the two troughs.

The neckline on GBP/EUR is situated at about 1.1900, and so it could be argued may already have been breached.

If the exchange rate can remain above the neckline then it will be a clear signal that the trend has changed and GBP/EUR is moving substantially higher.

As such, a move above the 1.1950 level would signal a definitive break above the neckline for us, with the next target at the next major resistance level at 1.2022 from the R1 monthly pivot, a level used by traders to gauge market direction.

A move above the 1.2075 level would mark a clear break above that level and signal a move up to the next target at 1.2225, which is based on an extrapolation of 61.8% of the height of the pattern – generating a minimum target.

Latest Pound/Euro Exchange Rates

	Live: 1.146▲ + 0.15% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.107 - 1.1116
**Independent Specialist	1.13 - 1.1345 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

UK Data to Watch: Services PMI Boost, Industrial Production Mid-Week

In the week ahead the main events for this pair are likely to revolve around the release of more data from the UK and the ECB rate meeting.

Services PMI data from IHS Markit and the CIPS have provided a boost to the Pound early in the week having confirmed the economy's largest sector expanded in the month of August, putting behind it the slump seen following the UK's vote to leave the European Union.

The data read at 52.9, well ahead of economist forecasts and market positioning that expected a reading of 50 to be delivered.

Business have reported that the uncertainty posed by the EU vote has started to abate with the forward-looking business expectations index recovering most of the ground lost in July:

Of note, it has also been reported that inflationary pressures are rising as a result of the weakened Pound.

Encouragingly, job creation has resumed in August having paused in July.

"Business optimism ricocheted back to pre-Brexit levels, reassured by market stability and clients bringing dormant projects back to life. Whether this steadiness continues will largely depend on the sector’s reaction to the UK Government’s approach to the Brexit negotiations as the sector keeps one eye on business as usual and one eye on possible obstacles ahead," says David Noble, Group Chief Executive Officer at the CIPS.

Despite the positive data, we note some analysts remain cautious on Sterling's prospects.

"GBP was buoyed by better than expected UK data of late. Further evidence that the initial Brexit shock is abating could help the currency consolidate some more across G10 FX next week. We believe it is too early to call for a turning point in the GBP outlook, however, and expect the currency to trade back closer to recent lows going into year-end," says a currency briefing from Credit Agricole.

The other main release is Manufacturing Production, which is likely to fall -0.4% mom in Jul from -0.3% in June, according to current expectations.

Quite whether this fits with the rebound found in the recent Manufacturing PMI is not easy to tell, but there is a possibility the July

Production figure may not be as negative as forecast, especially given the boost to exports – especially of manufacturing items – caused by the weak pound.

Beware Euro Strength on ECB Policy Meeting

The ECB meeting on Thursday is another major FX hotspot in the week ahead and our initial preview of the event suggests the potential for Euro gains.

The most significant issue will be whether the ECB increases its already very comprehensive stimulus programme.

Most analysts do not expect more stimulus in September despite the recent set of inflation figures which showed a slowdown in inflation from 0.9% to 0.8% in July.

“The European Central Bank's monetary policy announcement is the most important event risk next week. While no immediate changes in monetary policy is expected, ECB President Draghi is expected to remind investors that inflation is low, the economy is weak and easier monetary policy may be needed,” says BK Asset Management’s Kathy Lien about the meeting.

Elsewhere analysts at TD Securities echoed Lien’s sentiments, saying:

“While we look for the ECB to ease further before the end of the year, we don’t think that it’s going to happen in September, which should lead to an initial hawkish market reaction with the 12:45pm BST rate decision. However, we do think that President Draghi will say enough during the opening statement and press conference to suggest that a QE extension at the very least is on the way”.  

There is clearly, therefore, a chance that the pair will move higher as a result of the release if the ECB does decide to pull the trigger and increase wither the quantity or duration of its effort.

Again this falls into line with the technical outlook and the possibility of UK data surprising to the upside, as outlined above.