While GBP is trending higher it will be challenged by an impending resistance zone while the outcome of the Bank of England forms the week's main fundamental risk.
The Pound to Euro exchange rate trades at 1.1924 at the time of writing, within touching distance of the 1.2041 high achieved in the previous week.
We have seen the currency pair struggle around the 1.20 region and are therefore intrested in seeing how any potential attacks on that front-line is resolved.
However, as we note in our analysis below it's not just 1.20 that could be challenging.
For any kind of extended advance resistance here must be overcome if the rate is to challenge the mid 20's.
From a technical perspective, GBP/EUR has resumed its uptrend after pulling back from the highs in a classic A-B-C correction on the four-hour chart:
This seems to suggest the uptrend has now resumed, however, GBP/EUR is approaching a ‘resistance zone’ composed of several levels bunched near each other.
We believe the exchange rate will struggle to overcome this point.
Only by moving above 1.2200 can we assume that it has successfully cleared the resistance zone, and be expected to continue up to 1.2300.
On the other hand, a break below 1.1678 would produce a lower low which would be a sign of a change in the short-term trend from up to down.
Such a move would be expected to continue down to support at the lower channel line at 1.1590.
Those with currency payment requirements should be aware of the key levels mentioned here and consider building a strategy around the levels - for instance setting a stop-loss order just below 1.1678 would be a good place to execute your transaction in the event of a major capitulation.
Bank of England is Main Fundamental Risk
The Bank of England’s rate meeting on Thursday, December 15 and the mid-week Federal Reserve meeting, are the major events on the economic calendar in the week ahead.
There is not expected to be any changes in policy from Threadneedle Street but there is always a risk of more easing given the continued uncertainty over Brexit.
The minutes which will follow the meeting are likely to be the object of scrutiny as markets try to read hints of a change in stance, which is currently very accommodative.
UK inflation will be brought under the spotlight on Tuesday, December 13 when November CPI is released at 09.30.
The annualised figure is forecast to read at 1.1%, up from the previous month's 0.9%.
A beat on this figure would prove beneficial to the Pound in that it would imply the Bank of England may have to raise interest rates at some point in the future in an attempt to keep inflation settled.
However, if the figure underwhelms then Sterling could struggle.
On Wednesday, December 14 at 09.30 the ONS release unemployment data, which is forecast to show a 4.8% unemployment rate (Oct), a 5k rise in the Claimant Count (Nov) and Average Earnings Including Bonuses (Oct) rising by 2.3%.
On Thursday, December 14 at 09.30 Retail Sales in November is released and expected to come out at 0.2% month-on-month.
If these data remain robust then Sterling should be able to enjoy the fundamental support required to keep its recent recovery move in place.
Data for the Euro
It is a thin week for the Euro with the main data release CPI on Friday, December 16, which expected to show a rise of 0.6% yoy in November.
A beat on this figure should prove beneficial to the shared currency which has been kept under pressure by the ECB which has implemented a number of policies to stimulate inflation.
Then on Thursday, December 15 we get the release of Manufacturing and Services PMI for December, which are both expected to come out at 53.8.
The Euro is not as attuned to data as it once was and with the Federal Reserve meeting due this week we could well expect to see it take its cues from external siurces.