Update: Pound-to-Euro Exchange Rate 5 Day Forecast
Above: European Commission President Juncker this weekend told media a Brexit deal should be secure by November. Image © European Union , 2017 / Source: EC - Audiovisual Service.
- GBP/EUR hovers below fresh multi-week best
- Exchange rate now back into long-term rising channel
- E.C.B + Brexit headlines to dominate the calendar.
The British Pound shot to a new multi-week high against the Euro at the start of the new week before quickly reversing those gains as London markets opened.
The GBP/EUR exchange rate triggered a high at 1.1392 before paring the gains to trade at 1.1374 at the time of writing.
The declines are however currently not being seen as being a threat that the uptrend being experienced by GBP/EUR is over. Pound Sterling rose a respectable 1.43% last week against the Euro, climbing from 1.1219 to 1.1379 on a close-to-close basis with a new three-and-a-half month high was recorded at 1.1392.
Positive Brexit headlines and a steady-as-she goes Conservative party conference speech by U.K. Prime Minister Theresa May appear to have been amongst the catalysts for the rise with markets increasingly confident the E.U. and U.K. will strike a Brexit deal before year-end.
The Euro, meanwhile, was pressured by negative economic data from Germany and continued concerns surrounding Italy and its budget deficit.
From a technical perspective, last week's rise was game-changing and it has altered the whole complexion of the charts.
The surge higher now means the pair has confirmed a break back inside its longstanding channel, and that it has clearly breached on a closing basis a thick tier of resistance, including the 50-week MA and the 200-day MA.
With these tough glass ceilings now broken the way is left open for further gains, and there is little in the way of more resistance until it gets to the top of the channel at around 1.1625.
The optimism would therefore take the GBP/EUR exchange rate well above levels it is currently forecast to be at in both three and six month timeframes according to a poll of 48 of the world's leading financial forecasters. Horizon Currency Ltd have compiled a report detailing these forecasts, as well as the targets placed by leading names such as Citi, Goldman Sachs and HSBC. It can be downloaded here.
Only a few levels standout as offering potential obstacles and these include the R2 monthly pivot at 1.1440 and the April highs at 1.1500, however, these are relatively minor levels of resistance compared to the channel lines and big MAs the pair ripped through last week.
In last week's forecast, I established an initial target at 1.1450, however, I would probably revise that up to 1.1500 now, in light of the April highs being the next major resistance level to watch.
The R2 pivot at 1.1440 is also a resistance level, however, given the strong upside last week we see a limited chance of resistance at R2 in the 1.1440s, in the week ahead.
Once the exchange rate reaches 1.1500 there is an increased risk of a correction and we would want to see further confirmation before forecasting more upside from there.
A break above 1.1515 would supply that confirmation and signal a continuation up to the next target at 1.1600, close to the top of the channel.
For those seeking re-confirmation of an extension higher, a break above last week's 1.1392 highs would provide a green light.
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The Pound: What to Watch this Week
All eyes now turn to a meeting of European leaders at a dinner on October 17 when they review the state of negotiations with the U.K. ahead of the October European Council summit.
"In October we expect maximum progress and results in the Brexit talks. Then we will decide whether conditions are there to call an extraordinary summit in November to finalise and formalise the deal," European Council President Donald Tusk said at the Salzburg informal summit.
Expect market nerves to remain piqued over the next week as headlines, rumours, optimism and disappointment create an unstable environment for traders to navigate.
"Brexit remains the key driver for the GBP and uncertainty related to the outcome is likely to keep the GBP volatile," says Mikael Olai Milhøj, a foreign exchange strategist with Danske Bank.
The president of the European Commission, Jean-Claude Juncker, has meanwhile said on the weekend he is sure a Brexit agreement could be reached in November, if not sooner.
Jean-Claude Juncker told three Austrian newspapers that Brexit without a deal "would not be good for the UK, as it is for the rest of the union".
He added:
"I assume that we will reach agreement on the terms of the withdrawal agreement.
"We also need to agree on a political statement that accompanies this withdrawal agreement - we are not that far yet.
"I have reason to think that the rapprochement potential between both sides has increased in recent days, but it can not be foreseen whether we will finish in October.
"If not, we'll do it in November."
At the moment there appears to be a lot of support for a Canada +++ arrangement even from within Theresa May's Conservative party, so if the proposal is broadly well received, it could be a big moment for negotiations and a concomitant rise in GBP.
Of course, the risk of a rejection is also quite high, and, therefore, a fall in GBP.
The question of the Irish border remains a sticking point but the U.K. has said it will propose a solution in the week ahead so there may be movement from news about that too.
On the data front, the main release is probably going to be GDP data, which is forecast to show a 0.1% rise in August, when it is released at 9.30 B.S.T on Wednesday. In July GDP rose 0.3%. A higher than expected result would help GBP.
"Things are looking rosier for the third quarter and there should be more evidence of this from the monthly GDP estimates due on Wednesday. UK GDP is expected to have expanded by 0.1% m/m in August, to produce an annual figure of 1.5%," says a preview from FX broker XM.com. "On a 3-month basis, growth is forecast at 0.6%, which would match July’s rate and point to growth of a similar amount for the third quarter."
Another major release for the Pound is likely to be the trade balance in August, which is expected to show a -10.9bn deficit when it is released at the same time on Wednesday.
Industrial and manufacturing production are also out at the same time and are both forecast to show a 0.1% in August compared to the previous month.
Finally, the Royal Institute of Chartered Surveyors (RICS) house price balance is out just after midnight on Thursday morning and the retails sales monitor for September is released by the Consortium of British Industry (CBI) just after midnight on Tuesday morning.
The Euro: What to Watch
The main release for the Euro in the week ahead is likely to be the European Central Bank's account of its September 13 monetary policy meeting. Investors will be checking the report for signs of confidence in the economy from the governing council. Mario Draghi said inflation was relatively vigorous in the Eurozone in his recent testimony to parliament but since then the Euro has lost ground on Italy concerns, question marks over German growth and its financial sector and a strong Dollar.
Simmering Italian budget concerns may also be a risk factor in the coming week although the next crunch data is further off on October 15, the deadline for Italy to present its revised budget to the EU again.
The main hard data release for the Eurozone is industrial production data in August, which has been soft recently but is expected to recover by 0.4% month-on-month in August.
"Manufacturing has been something of a soft spot for the Eurozone, with survey data subdued and July industrial production falling -0.8% month-over-month.
Within the details, production of consumer goods dropped noticeably along with production of intermediate goods. There were, however, monthly increases in the production of capital goods (0.8%) and energy (0.7%)," says Wells Fargo, who add they are forecasting a rebound of 0.3% in August, with gains 'broad-based' and overall economic growth in the Euro-area in Q3 "steady" rather than "strong".
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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
