Pound-to-Euro Exchange Rate 5-Day Forecast: Technical Ceiling Likely to Limit Gains for Now

Image © Massimo Usai, Adobe Stock

- GBP/EUR has rallied back up to lower channel line, faces resistance

- Break of resistance opens door to 1.1450

- Conservative party conference key risk for Sterling this week

Pound Sterling is trading broadly higher against the Euro at the start of the new week with 1 GBP buying 1.1256 EUR at the time of writing. 

The gains add to a one cent gain by Sterling against the Euro last week amidst investor concerns about the outlook for the Italian economy, as well as data which showed price pressures fading in the region.

The Pound meanwhile showed resilience despite ongoing Brexit-inspired angst with some analysts saying that the Pound has more-or-less absorbed the risks associated with a 'no deal' Brexit. Another argument explaining Sterling's robust performance is that markets remain confident that a deal will be struck before year-end.

The question traders will be asking themselves as we enter the new week, and final quarter of 2018, is whether the rally will continue?

For one, strategists at U.K. high-street lender Barclays reckon the outlook is marginally optimistic.

Concerning the week ahead, our technical studies of the charts suggest further upside looks increasingly constrained by some tough resistance levels in the 1.1270s coming from the lower boundary of a long-term rising channel.

The channel was formed by the range the pair traded in between from September 2017 through to July 2018:

Shorter-term, resistance is also supplied by the 50-week Moving Average located at 1.1298 (the red line in the above).

We would want to see a clear break above these obstacles before confidently predicting more upside.

We think that technical pressure from these levels could pressure the pair lower towards support from the trendline at about 1.1175:

The trendline, meanwhile, should also provide some support that will prevent any significant declines.

A break above the 200-day MA - signalled by a move above the 1.1350 level - would provide a green-light for a move up to a target at circa 1.1450 initially.

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The Pound: What to Watch this Week

The Pound: What to Watch this Week

The main focus for the Pound in the week ahead will be discussions focused on Brexit at the Conservative party conference which culminates with Theresa May's speech on Wednesday, October 03.

May is expected to continue to try to generate support for her 'Chequers' proposal despite rejection from both the EU and eurosceptics in her own party.

Immediate market attention lies with Chancellor Philip Hammond and Brexit Secretary Dominic Raab who have both delivered addresses defending the government's current proposals known as the Chequers plan, hinting that no major change in course will be delivered by May mid-week.

Brexit Secretary Dominic Raab told the conference the European Union needs to "get serious" on Brexit and "they need to do it now".

"Our prime minister has been constructive and respectful. In return we heard jibes from senior leaders. And we saw a starkly one-sided approach to negotiation, where the EU’s theological approach allows no room for serious compromise," said the Brexit secretary. "And yet we are expected to cast aside the territorial integrity of our own country. If the EU want a deal, they need to get serious. And they need to do it now."

Chancellor Philp Hammond meanwhile told delegates that the Chequers plan was the only plan in town that delivers on a full exit while addressing the difficult question of the Irish border.

That both senior Conservatives towed the existing line suggests we might not hear anything revolutionary from Prime Minister May mid-week.

Therefore we would be wary that expectations for a fall in the Pound might be overblown.

"Brexit developments can buck the market at any moment, either way," says Robert Howard, who sits on the foreign exchange desk at Thomson Reuters. "Fortune may favour the brave, but speculators holding or mulling Sterling longs must be wondering about just how bold they should be as the annual UK Conservative Party conference looms."

Traders will be wary that the Pound has suffered at previous conferences.

Data from Reuters shows the Pound fell 3.75 cents in the first week of October last year, after a disastrous keynote conference speech by PM Theresa May.

"Sterling suffered from May's misfortune, amid perceptions that her hold on power had never looked weaker. A year earlier, the Pound fared even worse after May's conference message was perceived as signalling that Britain was heading for a hard Brexit," says Howard.

That first week of October 2016 ended with a "flash crash" for GBP, which saw cable tank to 1.1491 – its lowest for 31 years.

The main 'hard' data release for the Pound in the week ahead is likely to be Purchasing Manager Indices data (PMIs) for the manufacturing, services and construction sectors.

Manufacturing PMI, an indicator of activity in the Manufacturing sector, beat expectations by printing at 53.8 in September, markets had been expecting a reading of 52.6, and the beat will certainly be aiding some strength in the Pound we believe.

Services PMI is forecast to fall to 54.0 from 54.3 when it is released at 9.30 on Wednesday.

Construction PMI is expected to decline to 52.5 from 52.9 when it is released on Tuesday.

PMI's are survey-based indicators; a result above 50 signals expansion and below 50 contraction.

Other data for the Pound, includes the Nationwide house price index (HPI), out at 7.00 on Tuesday, and the Halifax house price index, out at 8.30 on Friday.

The Euro: What to Watch

The main release for the Euro in the week ahead is data showing the unemployment rate, which is forecast to remain unchanged at 8.2%, when it is released at 10.00 B.S.T on Monday, October 1.

Eurozone retail sales is forecast to show a 0.2% rise compared to the previous month when it is released at 10.00, on Wednesday, and a 1.1% increase compared to the 1.6% of the previous year.

Investors are likely to pay a lot of attention to data after disappointing data out last week showed core inflation slow to 0.9% compared to 1.1% previously, which was well below the authorities' target of just under 2.0%.

Part of the decline was due to lower consumer demand which is likely to be reflected in releases such as retails sales and unemployment.

There is a risk these could push the Euro even lower if they undershoot expectations.

The same goes for Eurozone manufacturing and services sector PMI revisions for September which are released on Wednesday at 9.00.

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Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here