The GBP to EUR exchange Rate has taken another notable dip lower and fallen below the 1.15 level to reach its lowest level since early November.
On Tuesday January 10 the exchange rate has fallen below a key support level we had been watching in the form of the 100 day moving average which is the red line in the below graph:
Now that this final level of support has given way we see the prospect of further decline as being likely.
Our analyst Joaquin Monfort took a look at the candelestick patterns on the chart ahead of the week and said a break below the hammer lows at 1.1531 would probably see the pair fall to 1.1505 - this target has been met.
He said it would then require a further break below 1.1460 to signal more downside to 1.1400 which is now our immediate target level.
The pair has now given back about 50% of the October-December rally and looks pointed towards the October lows ~1.10 which should provide substantial support.
Nevertheless, analysts at HSBC have told clients that they see a strong likelihood of the GBP falling to 1.0 against the EUR in 2017.
Those with international payments are looking at a rate ranging from 1.1050 through to 1.1354, depending on who their provider is.
At the start of the week we were looking at the best retail rates on offer being above 1.14 which confirms a notable loss of purchasing power.
The Return of Brexit
Over the weekend we received the first interview of the year from Prime Minister May and traders were keen for further guidance on Brexit.
However, there was no committment to seeking membership to the European Union's single market.
Rather, May was keen to emphasise that the UK would seek to control its borders in order to deliver on the public's key motivation for voting to leave the EU in June.
Diminished market access will likely lead to UK investment and economic growth trending lower over coming years.
"Prime Minister Theresa May said the UK could leave the single market to regain control over immigration. Details will follow in the coming weeks, while the selling pressure on the Pound will certainly stay until more details are revealed," analyst Ipek Ozkardeskaya at London Capital Group tells Pound Sterling Live.
Concerning the outlook, May has promised to give further details on her Government's Brexit strategy over coming weeks.
The exact dates for further communications are unknown but these moments will be the central fundamental driver behind Sterling.
Week Ahead for the Euro - ECB to Release Minutes
Turning to the Euro, one question analysts have been asking is whether the European Central Bank (ECB) is likely to stop printing money in 2017.
Whilst most think not, the December ECB policy meeting minutes may provide further clues as to the ECB's thinking on this matter.
If the minutes, scheduled to be released at 12.30 (GMT) on Wednesday 11, show any officials making a strong case to switch the printing presses off then the Euro could recover.
In December, the ECB announced an extension to its quantitative easing programme until the end of 2017, from a previous end-date in March 2017.
Analysts HSBC see the “hurdle” to a further extension beyond the present end date as high, due to “political pressures”.
HSBC’s Chief European Economist Simon Wells believes the ECB extended quantitative easing so as to “sidestep” potentially difficult discussions and provide a “safety net” for the European sovereign bond market during the politically sensitive elections in 2017.
However, any further extensions could meet opposition from hawkish policy makers, particularly in Germany so are unlikely.
The expected winding down of policy in H2 2017 is, therefore, likely to stimulate demand for the Euro as interest rates rise.
Events to Watch for the Pound in the Week Ahead
Of importance will be Bank of England (BOE) governor Mark Carney’s testimony at the Treasury select committee on Wednesday, Jan 11 at 14.15.
There is a risk Carney may use the opportunity to give markets a ‘head’s up’ of an imminent rate cut according to ING Bank’s Chris Turner.
Any such commentary could heavily weigh on Sterling.
Wednesday also sees the release of official Manufacturing Production data at 09.30 which is expected to show a rise of 0.5% from a minus figure previously.
Industrial Production, out at the same time, is expected to show a robust rebound of 0.7% from -1.3% previously.
Note that the recent manufacturing PMI data was better than analysts were forecasting, this could aid the recovery.
The Trade Balance, also out at the same time, is expected to show the deficit widen to -11.4bn in November.