The Pound-to-Euro Rate's Forecast For the Week Ahead

- GBP/EUR is trading near the bottom of its long-term range 

- Bank of England meeting is the main event for the Pound this week

- A speech by ECB president Draghi as well as several EU economic assessments are the highlights for the Euro

british pound concept 1

© Lakov Kalinin, Adobe Stock 

Pound Sterling fell in the previous week after the release of data which showed an unexpected slowdown in the services sector of the economy, and GBP/EUR ended Friday's trading down half a cent at 1.1309 against the Euro. 

More broadly, the pair is now trading in the lower half of its long-term range; with the range lows situated at about 1.1240.

Momentum is bearish as can be seen by the MACD indicator (circled) in the chart below, which has fallen below the zero line - a sign the asset is in a downtrend. 

Although the short-term trend is down there are multiple signs that the pair could be nearing the end of this short-term downtrend and there are risks it may be about to rebound back up towards the 1.1600 range highs again.

For example, there is substantial chart support lying right under the current spot price - highlighted by the orange box with hatching on the chart below - which makes further downside progress difficult and could provide the basis for a rebound.

One major support level is the monthly pivot (S1) at 1.1286. Pivots are levels on charts where price action often stalls, rotates or even reverses. There is a risk, therefore, that S1 might cause the downtrend to reverse.

In addition, there is also the 200-day moving average (MA) not far below at 1.1264, and this too is likely to impede downside progress.

Large MAs are difficult to overcome as they are the locations of increased supply or demand due to more trading activity because they are popular indicators amongst investors.

Another indication the short-term downtrend may be running out of steam is the shape of the pattern which price action has formed since peaking on April 17, which looks like an abcd pattern (outlined in red on the chart above).

The abcd may nearly be finished as legs a-b and c-d are usually of similar length, which means c-d probably does not have much further to go before it completes. if it is equal in length to a-b it will end at 1.1295 - close to the 1.1309 Friday close.

Once c-d finishes the market will probably rotate and start moving higher, as shown in the example of an abcd on GBP/JPY below, which we also showed last week.

This suggests the possibility of a reversal higher in GBP/EUR happening very soon; these countertrend indicators caution against a bearish forecast despite the perseverance of the short-term bearish trend.

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Data and Events to Watch for the Pound

The main event in the week ahead for the Pound is the Bank of England (BOE) interest rate meeting on Thursday, May 10 at 12.00 GMT.

Whilst previously expectations had been for the BOE to raise interest rates by 0.25% at the meeting, data showing a slowdown in growth and commentary from the governor of the BOE, Mark Carney, which brought into question the necessity of a May hike, have dampened expectations more recently.

Official market expectations now stand at roughly 20% for a hike; and Sterling has decline alongside these fading expectations. A recent survey of economists held by Bloomberg found that none of them now expect a rate hike on Thursday.

Therefore - we would expect a substantial boost were the Bank to defy expectations and raise interest rates. In theory, the Pound could retrace much of the losses witnessed over recent weeks.

The BOE's inflation report is also out at the same time, and will show the Bank's latest forecasts for the economy and can provide insight into how the Bank may formulate policy in the future.

If it expects inflation and growth to rise, for example, that could be bullish for Sterling as it will imply more rate hikes, and higher interest rates are usually positive for a currency.

We would expect guidance to be important for Sterling - what does Carney's assessment of the recent growth slowdown, is it temporary or does he believe it to be more entrenched? Will the BOE confirm further interest rate rises are indeed necessary over coming weeks? These are where we see the big story for Sterling lying.

A more upbeat assessment of the economy and the outlook could certainly turn sentiment towards Sterling for the better, while a downbeat tone could allow the recent sell-off to extend.

"We expect clear evidence of a sustained rebound in GDP growth to pave the way for next rate hike to in November 2018, followed by two more hikes in 2019," says a preview note from Berenberg.

"Our baseline case is that next week will mark a three month postponement to rate increases, with the next 25bp hike occurring in August," says Phillip Shaw, an economist from Investec.

Data releases are second-tier in nature. On Tuesday, May 08 at 8.30 large mortgage lender Halifax releases its house price index, which is forecast to show a decline of -0.3% month-on-month in April.

Wednesday sees the release of the British Retail Consortium's (BRC) Sales Monitor, which is forecast to show a -0.7% fall in April compared to April in 2017.

Thursday, May 10 sees the release of the Royal Institute of Chartered Surveyors (RICS) House Price balance just after midnight, which is expected to show a -1.0% fall in April.

Also out on Thursday is Industrial and Manufacturing Production at 9.30 with the former expected to show a 0.1% rise mom, and the latter a -0.2% decline.

Finally, the UK trade balance is out on Thursday and is forecast to show the trade deficit widening to -11.40bn in March.

Data and Events to Watch for the Euro

It is a quiet week for the Euro from a data perspective with the main releases consisting in economic reports from various major institutions of the EU, however, these could be instructive in providing an insight into whether the EU thinks the current slowdown is the start of a deeper malaise or a temporary blip. 

The first release is the Economic Forecast of the European Commission out at 10.00 GMT on Tuesday, May 08.

On Thursday the European Central Bank's (ECB's) Economic Bulletin is released at 9.00. 

Finally, ECB president Mario Draghi will be delivering a speech on Friday, May 11 at 14.15, which could provide hints as to his views about the situation in the Eurozone and the ECB's monetary policy strategy.

Of late we have seen the Euro struggle as economic data has underwhelmed against consensus expectations, suggesting that perhaps the strong spurt of economic growth that propelled the currency higher in 2017 might be fading.

Draghi's assessment of the Eurozone's growth trajectory could be key.

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