Pound-to-Euro Rate in the Week Ahead: Charts Suggest Recovery Potential
Prime Minister Theresa May failed to receive any concessions from fellow EU leaders last week, but we believe the EU might be holding their cards close until the very last minute © Number 10 Downing Street.
- New uptrend in GBP/EUR forms after recent fall down to the 1.10 area.
- Charts now suggest move higher in the coming week.
- GBP eyes BOE meeting as consumer data looms for EUR.
The Pound-to-Euro rate is quoted at 1.1125 at the time of writing, a recovery if we consider that exactly one week prior the pair was being quoted as low as 1.1006. The exchange rate rebounded from close to year-lows late last week and now, as we start the new week, the charts are appear to be promising a continuation of that rebound higher.
Sterling ended the previous week at 1.1128 after declining -0.41% in response to Prime Minister Theresa May having delayed Parliament's 'meaningful vote' on the EU withdrawal deal.
This was seen increasing odds of a 'no-deal’ Brexit, but disappointing Eurozone economic data drove a rebounded back up to 1.1128 on Friday.
The weekly chart is now showing a bullish hammer candlestick pattern, a classic reversal signal. If this week also produces a bullish candle then it will suggest a major low has been formed and a continued reversal is possible.
Above: Pound-to-Euro rate at weekly intervals.
The 4hr chart now also appears to be suggesting the trend is turning bullish, with the pair having made two sets of higher highs and higher lows, which is also a sign the trend may be turning higher.
The pair stalled Friday at what will now act as a resistance level, around 1.1125, where the S1 monthly pivot and the 50-period moving average are both situated.
This could be seen as capping gains by some analysts however, the moving average is not is not a significant one therefore unlikely to have a strong a resistance effect.
Above: Pound-to-Euro rate shown at 4-hour intervals.
A break above the 1.1168 highs would confirm a clear move beyond the average, likely giving way to a continuation of the trend higher to an upside target around 1.1250.
The relative-strength-index momentum indicator on the 4hr chart also turned higher with the recent recovery and now suggests more upside is on the horizon.
The RSI is now at the same levels it was at when the exchange rate traded in the 1.13s in late November. This also suggests there is upside potential in the week to come.
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The Pound: What to Watch
Following a rebuff from fellow EU leaders in the previous week, Prime Minister Theresa May's Brexit deal remains in a state of limbo: without changes from the EU it won't pass through parliament and the alternative routes going forward remain uncertain.
According to a Times assessment of the European Council summit, a deal of sorts had been agreed by EU leaders but it was pulled late in the day over fears that giving concessions now would only embolden Conservative party and DUP Brexiteers who would want further concessions.
Therefore, there is a sense that the EU are holding concessions back until the last moment. We will be looking for signs from Brussels as to what the roadmap, from their perspective, is for coming weeks, as this should offer a strong hint as to whether they have something to give.
The Pound will probably rally forcefully if concessions are won but could remain moribund into year-end without any. UK negotiators and diplomats are in Brussels all week.
For now, we look for signs that the renewed deterioration in Brexit sentiment is having an impact on the real economy.
"In the aftermath of May's latest rebuff in Brussels, uncertainty will be heightened and the markets will be fearful of an increasingly damaging effect on the real economy," says Guy Stear, an economist with Société Générale in Paris.
The main calendar event for the Pound in the week ahead is the Bank of England (BOE) interest rate meeting on Thursday.
Although no change in rates is expected from the BOE, markets scrutinise the BoE's statement for insight into its views on the latest wages data.
UK wages have risen sharply, which is normally a sign that inflation could be rising in a manner likely to draw a response from interest rate setters.
Uncertainty over Brexit will keep the Bank from raising interest rates for now, but markets will want to know the BoE's view on the latest data in order to gauge how soon after Brexit it is likely to take action.
Inflation numbers for November will also be released. Consensus is for the inflation rate to come in at 2.3% for November, down from 2.4% in the previous month. Core inflation is seen at 1.8%, down from 1.9% previously.
Core inflation doesn't include volatile fuel and food items so is seen as a truer reflection of domestically generated inflation pressure.
If the inflation figures surprise on the upside then they could lift the Pound because markets would see them as piling pressure on the BoE to raise rates soon.
The other major release is Gfk consumer confidence index for December, which is forecast to slide to -14, from -13 previously. It has been in negative territory since April 2016.
Retail sales are expected to have risen by 0.3% in November, up from -0.5% previously. Consumer spending and retail sales are significant components of GDP and can impact on the Pound.
Other key releases for Sterling in the week ahead include public sector borrowing for November. The current account balance, business investment and final GDP figures for the third quarter will also be released at the same time.
The Euro: What to Watch
The main release in the week ahead for the Euro is consumer confidence data for December, on Friday at 15.00 London time. The confidence index is expected to fall further, to -4.3, from -3.9 previously.
This could weigh on the Euro, which is already struggling due to weak activity data released last week, as it would suggest a further deterioration in the economic outlook for the bloc.
Other key releases for the single currency include the final estimate of November inflation, out on Monday at 10.00, and the balance of trade for October which is due at the same time. Current account data is out Tuesday.
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