The Pound-to-Euro Exchange Rate 5-Day Forecast: Possibility of Pull-Back Before Resumption Higher
Image © Melinda Nagy, Adobe Stock
- GBP/EUR’s short-term uptrend to continue
- Possibility of pull-back initially
- Pound Sterling awaits government's 'Plan B' for Brexit
- ECB meeting dominates Euro outlook
The Pound-to-Euro exchange rate is trading at 1.1328 at the start of the new week after rising 1.3% in the previous week, mainly as a result of easing no-deal Brexit fears, and as investors priced in the increasing probability of a second referendum.
Fundamentals aside, we are mildly bullish in our outlook for the week ahead on a technical basis, although further gains would be conditional on a break above last week’s highs at 1.1409.
The weekly chart shows the pair trading plum in the centre of a long-term range roughly encompassing 1.10 and 1.16, which is a neutral sign.
The ‘look and feel’ of the previous week’s price action, with the rejection from the highs, suggests bulls lost heart and is not a positive indicator, however, at the same time the exchange rate did successfully penetrate and close above the 50-week moving average, which is a bullish sign.
A break above the 1.1409 highs would provide confirmation for a move up to a target at 1.1600, at the range ceiling.
The daily chart is showing that the pair has broken above the 50 and 200-day MAs, which is a bullish sign. However, it has also formed a bearish reversal pattern at the highs called a 2-bar reversal.
This occurs when the market forms a long up-candle which is immediately succeeded by a down candle of a similar length from the same high point.
Such a pattern happened on Thursday and Friday when the market moved strongly higher and then strongly lower following negative UK retail sales data. An example of such a pattern and the decline which usually follows is shown in the chart above.
The 2-bar reversal is a short-term bearish signal and it is possible the pair could pull-back down into the 200 and 50-day MAs in the zone between 1.1195 and 1.1277 before the market continues higher.
Again, this bearish signal is another reason why the market needs to break above the 1.1409 highs to confirm a continuation.
The 4-hour chart shows that the short-term trend is bullish and suggests more upside to come. It shows how the exchange rate climbed in ascending peaks and troughs after the January 3 lows. The pair has formed two higher highs (HH) and higher lows (HL) on the 4hr chart, and this is indicative of the establishment of a new short-term uptrend.
Although the pull-back since the Jan 17 highs has been on sharply declining momentum, the overall trend still remains marginally bullish.
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The Pound: What to Watch
The main factor influencing the Pound in the week ahead will be the next instalment of the Brexit saga. On Monday a motion will be put to Parliament which, if voted through, would ‘express the will of Parliament against 'no deal’.
"MPs will tomorrow unveil their plan to hijack the agenda of the Commons to suspend article 50, the mechanism by which the UK is leaving the EU," reports the Sunday Times.
Any motions aimed at preventing a no-deal Brexit are tipped to have a good chance of being voted through since it is the only option which appears to be supported by a majority of MP’s. If it is passed, it will further reduce the probability of a disorderly hard-Brexit and support the Pound.
The Sunday Times meanwhile reports the Prime Minister Theresa May will meanwhile likely disclose her 'plan B' option aimed at salvaging her Brexit deal.
"She wants to offer a bilateral treaty to Ireland that would remove the hated “backstop” from the EU withdrawal treaty and prevent a hard border by other means," says Tim Shipman, Political Editor at The Sunday Times.
On the 'hard data' front, the main release is labour market data on Tuesday at 9.30 GMT. The consensus forecast is for 20k jobs to be added in December, for the unemployment rate to remain at 4.1% in November, and for average earnings (including bonuses) to rise 3.3% compared to a year ago, also in November.
A higher-than-expected result would support Sterling. UK data has been mixed recently. Last Friday the Pound floundered after UK retail sales showed an unexpected decline of -0.9% in December, which was below the -0.8% expected, and there is a risk that more data misses will build a picture if decline which further weighs on Sterling.
The Euro: What to Watch
The main event for the Euro is the European Central Bank (ECB) rate meeting on Thursday at 12.30 GMT.
Although no change in policy is expected at the meeting the markets will be watching what is written in the statement and what president Mario Draghi says in his press conference afterward.
Investors will be especially keen to hear the ECB’s assessment of the Eurozone economy in the wake of the sharp slump in growth recorded in the second half of 2018. If the ECB's assessment is also more negative than expected, the Euro will probably weaken, if there is no change in the message, it will trade at the same level.
“Draghi will probably be quizzed by reporters on what the central bank intends to do if the economic backdrop in the Eurozone continues to worsen. Any indication that the Governing Council discussed delaying a rate hike or even loosening policy could send the Euro tumbling against the greenback,” says Raffi Boyadjian, market analyst at broker XM.com.
A glut of sentiment data dominates the economic calendar for the Euro in the coming week.
The main release on the sentiment data front is Eurozone Manufacturing and Services PMIs for January out at 9.00 GMT on Thursday. PMIs have been in decline since the start of 2018 and analysts will be keen to see if the trend has extended into 2019. An important watershed for the metric is 50. A result below that is indicative of decline; a result above is indicative of growth.
The composite PMI, which is a broad gauge - a combination of the results for the two sector PMIs - is forecast to recover slightly in January to 51.4 from 51.2 in December. Such a recovery might help support the Euro because it might raise hopes the slow leeching lower in 2018 was coming to an end.
The German ZEW survey of 350 financial professionals is published on Tuesday, at 10.00. In the previous month it recovered a touch after beating expectations of a -23 result by coming out at -21 instead, which, whilst still very pessimistic, was still nevertheless better. Markets will be watching whether the same can be said of January, and if it can, the Euro could gain some respite.
The final sentiment release is the IFO sentiment survey of German business managers, out at 9.00 on Friday.
All these surveys are seen as fairly reliable forward gauges of future activity and are used by analysts to help provide a preview of harder data which is normally released latter and can affect markets more.
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