The Pound to Euro exchange rate has cast aside its December blues and continues its nascent January advance.
The pair has risen to 1.1774 at the time of writing having started the year at 1.1691.
Pound Sterling was in retreat for much of December with the highs of 1.20 being rejected from where it suffered a slip back to sub-1.16 levels.
However, the ongoing recovery confirms the pair was uncomfortable at such low levels. Part of the reason the Euro strengthened through December was because the European Central Bank (ECB) faded its asset purchase programme as 2016 drew to a close.
The new year should see the ECB return to the market and agressively purchase a multitude of bonds which could see Eurozone yields come under pressure once more, which will in turn likely weigh on the single currency.
Our studies therefore suggest GBP/EUR is turning higher in the short-term.
The exchange rate formed a long hammer candlestick on Friday 31 when those sub-1.16 levels were firmly rejected:
Hammer candlesticks are bullish reversal signs, which consist of a long range with a small ‘body’ (the body is the difference between the open and close) situated at the top of the range such that the day resembles a ‘hammer’.
The hammer has pierced the extremes of the lower Bollinger Band, which is the violet-coloured channel wrapped around price action.
The Bollinger Band is used to identify price extremes.
When an outer band is pierced, it indicates price action has reached an extreme and the chances are higher that it will recoil back inside the bands, or ‘revert to mean’.
The fact that most of Friday’s hammer is outside the lower Bollinger suggests a price extreme was reached and the exchange rate is likely to rise.
Tough resistance from the monthly pivot (PP) directly above price, and the Bollinger’s moving average may make upside progress slow.
A break above the 1.1900 level would confirm a clearance of these tough resistance levels, however, and indicate a continuation up to a target at 1.2000.
A less likely alternative is a continuation of the bearish correction, with confirmation coming from a move below 1.1450 and the S1 monthly pivot, and a downside target at 1.1350.
Keep an eye on EUR/USD - we believe this exchange rate could be instrumental in deciding GBP/EUR direction as Euro weakness in the headline pair is likely to result in Euro weakness elsewhere.
We note the pair has turned south again, and this appears to be correlating with the recent recovery in GBP/EUR.
Analyst Phil Seaton at LS Trader, in a note seen by Pound Sterling Live, says there is a strong tendency for this market to post either its highest or lowest price of the year in January.
"Given that this is a key market and is largely impacted by the dollar, this will be an interesting pattern to monitor this month to see if it plays out. If it turns out that January is the high of the year in EUR/USD, we can expect this pair to go well below par before 2017 is up," says Seaton.
Such a break down will certainly keep GBP/EUR supported.
The Week Ahead: Data and Events Concerning the Pound
The main data releases for this week are Manufacturing, Services and Construction PMIs for December. (We will cover the data and the Pound's reaction here).
The week starts with Manufacturing PMI on Tuesday, January 3 at 9.30, which is forecast to pull-back a basis point to 53.3.
Construction PMI follows on Wednesday, January 4, and is forecast to rise to 53.0 from 52.8.
Services is out on Thursday, January 5, and is forecast to pull-back to 54.7 from 55.2.
Should the data beat estimates then we could well expect Sterling to tread higher, any misses could however feed into the December downtrend.
Also watch the Bank of England’s (BOE’s) Andy Haldane who is speaking on Thursday 5; we do not expect any fireworks but be wary nevertheless.
Lending and Consumer Credit data is out on Wednesday the 4th - this data typically does not move Sterling but it will give us a sense of the direction of the UK economy heading into the new year.
The Week Ahead: Data and Events Concerning the Euro
The main release for the Euro is the Inflation data on Wednesday, January 3.
The Headline result is expected to rise substantially to 1.0% from 0.6% previously, but the Core result is the more important in many ways.
Headline inflation has risen whilst Core has stagnated at 0.8%, and is expected to remain at 0.8% in December.
A rise in Core inflation above the expected 0.8%, however, could provide a backdraft for the Euro, as it will show surprising movement in Core prices.
German Inflation data on Tuesday, January 2 could provide a head’s up for the Euro-wide result on the next day, and any rise in Core German prices may move the single currency higher as well.
Tier two data consists of Manufacturing and Services PMI for December, out on Monday (Manu) at 9.00 (GMT) and is expected to rise to 54.9 from 53.7 previously.
Services PMI out on Wednesday, meanwhile, is expected to fall to 53.1 from 53.8 previously.
Economic and Business Sentiment data is out at 10.00 on Friday, January 5.