Pound-to-Euro Rate 5-Day Outlook: Tipping into Bear Territory

Modified: Monday, 29 October 2018 10:59 BST

- Losses turn short-term trend bearish for GBP/EUR.

- More weakness possible though strong supports are near.

- GBP eyes BOE rate meeting, GDP and CPI in focus for EUR.

Pound Sterling is treading water at the start of the new week with the currency marginally higher against the Euro at 1.1259. The gains come ahead of the 2018 budget speech due mid-day however we do not expect any positive or negative impact from the event to have a long-lasting bearing on a currency that remains resolutely focussed on brexit.

We also expect the budget speech to largely be neutral as the Chancellor eyes Brexit uncertainty; he is unlikely to make any major pledges until certainty on the future trading relationship between Europe and the U.K. is made clear. This is therefore likely to be a Sterling-neutral event.

From a technical perspective, the Pound-to-Euro exchange rate trend may have turned bearish after a several days of steep losses and further weakness could be just around the corner.

Above: Pound-to-Euro rate shown at daily intervals.

GBP/EUR has formed two 'lower lows' and two 'lower highs' since the October 10 peak, which is just one sign of a bearish change in trend.

The pair has also broken below the lower border of its longer-term rising channel, not long after the price moved back inside that channel. This suggests caution is in order because, although the trend may have changed, there are also obstacles to a deeper decline.

First, the 50-day moving average is situated nly 10 points below last week's close, at 1.1235, and a further level of support sits at 1.1230. These two levels are likely to be difficult for the market to breach.

A clear move below both supports is needed for confirmation of a continued downtrend. A break below 1.1210 would open the door for a move down to 1.1120 and the September lows.

The RSI momentum indicator in the lower pane has fallen along with the exchange rate but is now at the same level it was at in September when the exchange rate was down around 1.11. This is a bearish sign.

Above: Pound-to-Euro rate shown at weekly intervals.

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The Pound: What to Watch

The budget statement on Monday at 13.30 is an event that could impact the Pound during the week ahead.

Economic growth forecasts and government spending plans will have an impact on both bond and currency markets but we are told that Chancellor Philip Hammond will likely play a neutral hand as he awaits the outcome to Brexit negotiations before delivering a fundamental shift in direction.

The impact on Sterling is likely to be neutral.

The main in the week ahead for the Pound is the Bank of England (BOE) interest rate announcement and quarterly inflation report, due on Thursday, 01 November at 13:00.

The BoE is not expected to change its interest rate so markets will focus on the contents of the inflation report and commentary from governor Mark Carney in order to gauge when the bank's next likely move on interest rates will come.

If the BoE's forecasts still show inflation remaining above its target in 2021 then Sterling may find support because markets would infer that the bank remains on course to keep raising interest rates over coming quarters.

Inflation rose to 2.7% in August, from 2.4%, when markets had looked for it to rise to only 2.5%. The recent rise in wages could also factor in the the BoE's forecasts, as that also supports expectations of higher inflation ahead.

Brexit remains the great unknown that might prevent the BoE from revealing its hand too much but assuming the government can agree to a transition period after March, the BOE is likely to raise interest rates again in May 2019 according to ING Group.

"If a majority of MPs approve the agreement in the Parliamentary vote (despite all the current bluster), then the UK will leave the EU on time in March and the transition phase will commence. This somewhat smoother outcome would keep the door open to a May rate hike," says James Knightley, an economist at ING.

Analysts at broker XM.com say the BOE will probably use Thursday's meeting to reiterate its forward guidance for 1-2 rate hikes per year over the next few years.

"It’s less probable that the BoE will modify its guidance of 1-2 rate increases per year over the next few years. The pound could firm slightly if Governor Mark Carney stresses in his press conference that the risks to inflation remain to the upside," says XM.com.

UK Manufacturing and Construction PMI's are also due out in the week ahead, with both likely to impact expectations for fourth-quarter economic growth. The manufacturing PMI is expected to fall to 53.0 for October, from 53.8 previously. The construction PMI is seen declining from 52.1 to 52.0.

The Euro: What to Watch

The main release for the Euro in the week ahead is third quarter GDP and CPI data due at 10:00 am on Tuesday and Thursday respectively.

GDP is expected to have risen at an annualised pace of 1.9% during the third quarter, slower than the 2.1% seen previously. If the actual figure is better than markets expect then the Euro could strengthen.

Inflation is expected to have risen by 2.1% during the October month, unchanged from Septepmber, although the core inflation rate is seen rising 10 basis points to 1%.

Markets will scrutinise the inflation numbers closely for signs that forecasts of a pickup in price pressures, from the European Central Bank, are being borne out.

The Eurozone unemployment rate is another key release in the week ahead. It is expected to have remained at 8.1% in September, although the exact number will not be released until 11.00 on Wednesday.

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