The British Pound has fallen against the Euro on six of the last seven days confirming a growing downward bias.
A swing back to 'harder Brexit' talk and the suggestion from International Trade Minister Liam Fox of a Turkey-style interim solution which would only give the very barest bones of access to the common market may have been the source of Pound Sterling's recent bout of weakness.
Meanwhile, the bailing-out of struggling Italian lender Banco Monte die Piaschi di Sienna may have supported the Euro which has had a strong festive season, rising versus the both the Dollar and the Pound.
Concerning the outlook, GBP/EUR looks poised to break below a major trendline from the October lows which would then open the sluice gates lower.
A break below 1.1700, for example, would confirm the trendline penetrated, and generate a new target at 1.1600 where the 50-day Moving Average (MA) is situated.
According to technical analysis, when the exchange rate breaks below a trendline it is generally forecast to fall the same distance as the move prior to the break.
On the chart below the move prior to the break has been labeled ‘x’ and the move after ‘y’.
According to the principles of technical analysis therfore, y should equal x (y=x), and this roughly corresponds with the target of 1.1600, if not lower.
The falling MACD indicator in the lower pane, has broken below its signal line indicating more downside is likely in the underlying asset.
While short-term momentum appears pointed lower it is far too soon to suggest Sterling is on the cusp of another major break lower.
A majority of analysts see the Euro as vulnerable to political risks in 2017, particular in the lead up to France's presidential election.
Xtrade’s Paul Sirani argues that the “dispersion” of forecasts for EUR/GBP, which is the widest in a decade at 0.73 – 1.00, is as a result of the unprecedented political risks in the UK and Eurozone:
“This dispersion is largely a function of today’s unprecedented political turmoil, whether you view Brexit’s tortured implementation path or the European political populism threat as the greater risk.
“Our view is that the muddle and uncertainty plaguing the British process is less threatening than the real and growing risks facing the continent, so look for sterling strengthening to some 0.8 £/€.”
Those who argue for a stronger Euro in 2017 meanwhile see tapering of the European Central Bank's asset purchase programme towards the end of the year as the catalyst for more upside in the currency.
The Euro: Data to Watch this Week
From a hard-data perspective, the main release for the single currency will be private sector Loans in November, released on Thursday morning at 09.00 (GMT), which came out at 1.8% previously.
The release of loans data is significant for the Eurozone as it is will show how well transmission of monetary policy is working.
The European Central Bank will want to see a high increase in loans as it will prove monetary stimulus is filtering down into the real economy.
Also, out at 09.00 on Thursday 28 is Money Supply (M3), which the majority of analysts have forecast at an unchanged 4.4% rise in November.
Sterling to Remain Driven by Sentiment, 2017 Forecast to Offer a Recovery
The Pound has recently lost some value from a resurgence of “Hard” Brexit talk.
Liam Fox has suggested a transitional phase might resemble the Turkish model, however, Theresa May did not provide any details when she also suggested the adoption of an interim model.
If there is any further talk of Brexit from leading authorities in the week ahead then that could move the Pound, since data is very thin, and only includes
After one of the worst years in its history, the British Pound could make a comeback in 2017 according to Nordea Market’s FX Strategist Aurelija Augulyte.
“2016 was a disaster for the GBP, as the unexpected Brexit vote knocked it off most since the Lehman crisis,” says Augulyte in a recent briefing to clients. "Next year it will stage a comeback.”
The Pound fell to multi-year lows against both the Euro and US Dollar amidst a free-fall in certainty and confidence in the wake of the UK's decision to exit the European Union.
The year ahead will be crucial for Sterling as it will start taking direction from the progression of Brexit negotiations.
Yet, Augulyte strikes a positive tone regarding the prospects for the UK currency on this front as she believes the worst is over.
“Now that the hard-Brexit has become a market’s baseline, should we shift towards a softer form of Brexit – avoiding an exit “cliff” with a transition agreement – the markets will be relieved. It could happen as PM May will deliver the Brexit plan before actually triggering Article 50,” says the strategist.