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Pound-to-Euro Rate 5-Day Forecast: Market Juggles Davis Departure, May's Soft-Brexit Plan

- Sterling stable despite news of David Davis quitting May's government

- Market's reaction to May's 'soft Brexit' approach at Chequers will set tone for the week ahead

- Underpinning support from the 50-week MA and hopes of a Brexit deal consensus may lift GBP

May and David Davis

Prime Minister Theresa May and Secretary of State for Exiting the European Union, David Davis. Image © Number 10 Downing Street

The British Pound starts the new week on a remarkably stable footing, despite news David Davis has quit as the Secretary of State for Exiting the European Union, a move that should inject some uncertainty into the future stability of the UK government and Brexit negotiations.

In his resignation letter Davis blamed the “dilution” of Brexit, delays to the White Paper, and omissions from the “backstop” customs proposal that would leave the UK in a “weak negotiating position” at best. He says his role requires an “enthusiastic believer” in May’s approach rather than a “reluctant conscript”.

Press coverage of the resignation suggests Davis has been unhappy with the government's approach for some time now and was "fed up."

Davis was followed by deputy, Steve Baker, and another Brexit minister Suella Braverman.

Following the news the Pound-to-Euro exchange rate was seen trading relatively flat at 1.1307. The market did gap higher to above 1.1340, but then pared gains as news of Davis' resignation filtered through. 

Pound up and down

"GBP was a big mover to start the week, rallying on the open following Friday's cabinet agreement on PM May's Brexit plan for "a free trade area for goods" with the EU and maintain close trade ties in what has been dubbed the Chequers "peace deal". But underlining the deep divisions in the Conservative Party over Brexit, days after the Chequers meeting, Brexit minister David Davis resigned over the plan, followed by a number of other junior ministers, dampening the optimism," says Sue Trinh at RBC Capital Markets.

For Pound Sterling, the tenor for the week ahead was always going to be set by the initial judgement delivered by markets to Theresa May's Brexit plan - details of which were announced after markets closed on Friday. Now markets will have to consider the potential for more resignations and ultimately a vote of no confidence by her party.

May's demand for a unified stance from a previously fractious cabinet appeared to mark a turning point in the Brexit debate and welcomed Sterling the much-needed certainty required to stage a relief rally.

May had united her cabinet around a way forward on Brexit that includes proposals for a free trade area for industrial and agricultural goods, based on a "common rule book" and a "combined customs territory".

Initial reaction by business groups was positive, which immediately suggests this is a market-friendly outcome that could well support Sterling into early trade.

"This looks like a pretty ‘soft’ Brexit. What matters for GBP markets now is whether Brussels can work with this plan. If they can - could see a pretty big relief rally in GBP next week. If not, last para of ‘No Deal’ Brexit preparations comes into focus & GBP under pressure," says Viraj Patel, a foreign exchange analyst with ING Bank N.V.

The new plan maintains a frictionless border with the EU but at the same time allows the UK to freelance its own trade deals overseas collecting tariffs on behalf of Brussels for goods arriving on English shores destined for the EU.

The plan appears to provide a compromise on most of the major previous sticking points but Brexiteer purists view it as Brexit 'in name alone' as it de facto keeps the UK in the common market whilst removing its right to a veto, and there are already rumblings of descent from euro-skeptic backbenchers.

Yet for financial markets, it is likely to be received as a sensible proposal and therefore better for the economy.

If May can hold onto power and her plan gains traction and becomes a realistic solution the Pound should bounce back in the week ahead. The main determinant of whether the deal has longevity is the reaction of EU partners in Brussels, especially on the sticking point of freedom of movement.

With an apparent cabinet mutiny taking place, Brussels might however be forced to show their hand earlier than they would have liked in order to shore up support for the Prime Minister. They know if May goes and is replaced by someone who advocates for a tougher Brexit, the prospect of a 'hard Brexit' becomes very real.

 

Technical Studies Suggest Sterling has Support

From a technical perspective, the floor is provided by the 50-week moving average (MA) which - as can be seen from the chart below - has reached under last week's price action and provided a supportive safety net.

GBP to EUR week ahead

For technical analysts, the 50-week acting in this way is the equivalent of a giant putting its arm under price action. The 50-day acts as a level of support on charts, but the 50-week is even bigger, and its placement reduces the chances of more downside and enhances the possibility of a rebound substantially.

The 4hr chart below is often used by technical traders for determining precise entry and exit points. For a bullish trend to take seed, therefore, we would look for a break higher on the 4hr initially.

So far we have not seen enough evidence yet that the pair is rising, but the look and feel of the 4hr, especially the MACD momentum study which looks like it is about to rise adds conviction to our overall bullish call. 

GBP to EUR short-term chart

The key level to would be the 1.1363 highs (circled), with a break above those adding confirmation, and probably seeing the exchange rate move up to 1.1400 initially, if not even to the top of the range, depending on the velocity of the move.

As things stand the youthful rebound from the June 29 lows is insufficiently evolved to call a new trend higher. It would have to break above 1.1363 to establish two higher lows and higher highs, which is the most common litmus test for the establishment of a new short-term trend higher.

Overall, there thus appears a bias of for a rebound higher in the week ahead, perhaps even towards the range highs in the 1.15-16s given the pair appears to have found a floor towards the bottom end of the longterm corridor - yet if there is a proviso, then it is that it has not yet actually touched the lower borderline in the lower 1.12s the spectre of a stumble remains a danger.

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Data and Events to Watch in the Week Ahead for Sterling

The reaction of the EU to Theresa's new Brexit proposal, especially that of the EU's chief negotiator Michel Barnier, will be a key issue in the week ahead for Sterling, probably the most significant event, assuming a reaction is forthcoming.

"While GBPUSD advanced on news that UK Prime Minister Theresa May won support for her 'soft Brexit' approach to the customs union internally, the real test is whether the EU is warm to their position," says John Kicklighter chief strategist at DailyFX.com.

Beyond that, however, it is a relatively quiet week for the Pound, with the most significant data industrial and manufacturing production, and trade data for May released on Tuesday, July 10 at 8.30 GMT.

Last week the pound was supported by strong Services PMI data for June which helped dispel fears of the Q1 slowdown extending into Q2 - the big question now is whether heavy industry experienced the same recovery and if it did it will probably support Sterling.

"A strong set of figures would almost certainly give the pound another leg up," says Rafi Bouyadjuidan, an analyst at XM in his week ahead commentary.

Yet not all analysts share his view:

"The manufacturing output is unlikely to alter the view of Sterling trapped in corrective mode against the US Dollar in the week ahead," counters Mario Blascak, an analyst at FXStreet.

The other main release for the Pound is the new monthly GDP estimate (for May) out at the same time as the other data on Tuesday.

 

Data and Events to Watch in the Week Ahead for Euro

The most important release for the single currency in the week ahead is probably the minutes from the European Central Bank (ECB) meeting out on Thursday, July 12 at 11.30 GMT.

These may give the market an idea of when the members of the ECB council envisage interest rates in the area rising - and higher interest rates generally boost currencies.

The June ECB meeting statement was less enthusiastic about raising interest rates, leading to a fall in the Euro, however, if the minutes show a different picture of the council;'s deliberations and encourage a more upbeat outlook the Euro could recover.

Whilst the ECB inferred the next rise in interest rates may not take place now until the end of 2019, "it appears that some ECB policymakers are not happy with the market pricing and are viewing September or October as a more probable timeframe," says Rafi Bouyadjuidan, an analyst at XM, thus leading to speculation the minutes could tell a different side of the story.

ECB President Mario Draghi will also be speaking in the coming week, on Monday afternoon and Wednesday morning.

Another major release is the ZEW business confidence index, which is out on Tuesday, July
10 at 9.00 GMT.

ZEW is often a leading indicator for the Eurozone economy so a confident assessment from businesses could support the Euro.

Finally, Germany releases export figures on Monday at 6.00 GMT, with exports forecast to  have risen by 0.75% and the trade surplus to have risen to 20bn Euros in May?

"German trade numbers will start the week on Monday. Exports from the Eurozone’s largest economy are forecast to have risen by 0.75% month-on-month in May. German exports have fallen in three out of four months this year so a positive figure for May would add to the growing evidence that growth picked up towards the end of the second quarter," says Bouyadjuidan.

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