When it comes to foreign exchange forecasting, perspective is everything.
A currency pair looks very different depending on which timeframe it is being viewed in and it is critical to keep in mind short-term, medium-term and long-term approaches.
Indeed, the near-term prospects could well look very different to the longer-term prospects.
And because we have no idea what fundamental-based surprises will be thrown at Pound Sterling by the government and European Union in upcoming Brexit negotiations, technical analysis is arguably the cleanest way to approach the pair at this juncture.
With that in mind, Pound Sterling Live have looked at the monthly and weekly charts for GBP/EUR to get a better understanding of how the year may play out from a technical perspective.
This should allow readers with an interest in this market to identify whether any strength has the legs to extend or whether said strength is a mere recovery within a broader trend lower.
Long-Term Outlook: A Recovery Beckons Over Coming Months
The graph below shows an example of a bullish measured move pattern on the stock chart of US retailer Wal-Mart.
These patterns can come in either bullish or bearish varieties.
The reason why it is releavant is that a similar pattern has formed on the monthly GBP/EUR chart, shown below:
These patterns are also called ABCD's because analysts annotate them using these letters.
For a pattern to qualify A-B needs to be roughly the same length as C-D.
Now that the pattern has completed there is a high probability of the trend changing, which in this case would be from down to up.
Indeed, this has already partly happened with the recovery from the October 1.06 lows - we are currently in the 1.17s.
Because this is the monthly chart, it is probably indicating the start of a major long-term trend higher.
The particularly bullish month of November (with the blue "P" circle above) is also a “bullish engulfing” Japanese candlestick pattern, with further bullish connotations.
The Medium-Term Outlook
On the weekly chart, the standout technical feature is the particularly bullish hammer candlestick which formed in the final week of the year (circled below).
It seems highly unlikely the market will fall below the hammer’s lows in the immediate future, supporting a bullish outlook for the pair.
If we overlay the chart with a trendline, a key resistance level and the 50 and 200-day moving averages it shows a cluster of resistance lines in the region between 1.1900 and 1.2200.
This zone is likely to be an obstacle to any bullish moves higher and recommends the exercising of caution.
The most important resistance level is the trendline, however, so if the exchange rate broke above that it would lead to a more bullish outlook.
This would be confirmed by a move above 1.2000.
Overall despite the resistance clustered above the exchange rate we retain a bullish bias seeing a higher probability of an uptrend developing from here.
Short-term View: Under Pressure, but Could Rise
Sterling has come under pressure against the Euro through the course of the first week of 2017, largely thanks to the notable recovery in the headline EUR/USD rate.
It appears that the exchange rate is currently taking its cues from its bigger cousin and will likely do so for some time.
The slip seen in the January 4-5 period does question our initial bullish forecasts for the pair which anticipated a move towards the top of recent ranges.
The four-hour chart is showing a three-wave move higher has formed since the lows of November 29.
Normally this is just a correction before the main downtrend resumes, however, given our overall bullish stance on the pair this may not be the case here.
A break above the 1.1833 highs, for example, would change the very short-term trend to bullish.
Such a break higher would indicate a target at 1.1950/1.2000 resistance.
The MACD is above the zero-line indicating that the exchange rate is probably in an uptrend.
As mentioned, at the time of writing this forecast is looking shaky owing to the sell-off below 1.17, but we would like to see how the week finishes before completely writing it off.
We have the sense GBP/EUR will hold on to recent ranges in the near-term.