The Pound-to-Euro Rate 5-Day Forecast: Technicals Bullish, EU Decision on Brextension is Key Risk
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- GBP/EUR technicals suggest further gains
- EU to decide on offering UK Brexit extension
- Cross-party talks success could unlock GBP gains
- Watch for a potentially key Brexit deal vote on Thursday
- ECB dominates EUR's week ahead
A pivotal week for the British Pound lies ahead with the EU due to decide whether to offer the UK a long Brexit extension while an unlikely cross-party Brexit deal between the Labour and Conservative parties could finally put an end to a period of chronic uncertainty.
Without doubt, what happens on the Brexit front will determine where the Pound-to-Euro exchange rate trades over coming days: a breakthrough in talks between Labour and the Conservatives could spur a rally to fresh multi-month highs. Alternatively, a failure in cross-party talks and a decision by the EU to decline a long Brexit extension could see sharp declines in the exchange rate.
With the above in mind, what are the levels to watch and what is our technical forecast?
From a technical perspective, the Pound remains in control and our forecast for GBP/EUR is still, on balance, bullish given the pair remains above the key 1.1600 level of the long-term range ceiling.
We are still of the view that a break above the 1.1801 yearly highs would probably provide the green light for the next leg up to a target at 1.1950, where the 200-day moving average (MA) is likely to cap further gains.
On the daily chart we note that although the pair has corrected back down a little it still just about remains above the top of the long-term range, and this further suggests the pair remains bullishly biased.
GBP/EUR has formed a sideways consolidation since the middle of February and the prior uptrend means it is biased to breaking higher.
But there is one Concerning Technical Development
Yet at the same time, we cannot ignore the shape of the consolidation and its patterning, which suggests an outside risk that it could also be a bearish fulcrum pattern. These sorts of patterns come from a type of chart analysis called Point and Figure and they are bearish. The normally can be identified by the dip in the middle of the consolidation such as that provided by the March 21 lows.
Indeed a break below those key lows at 1.1463 could mark a considerable turning point and provide confirmation of more downside to a target at 1.1330.
Momentum, as measured by RSI, is declining and could be a sign the pair is about to weaken further too, however, it is a secondary signal and is not sufficient to change the overall forecast.
The 1.1600 range highs are the key line in the sand for the pair. If the exchange rate decisively breaks and closes back below this level on a weekly basis, it will re-enter its long-term range, which would be a bearish sign. As long as it remains above the range highs, however, the bias is still bullish.
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The Pound: What to Watch
The Pound was supported ahead of the weekend on reports European Council President Donald Tusk will this week propose to European leaders they offer the UK a 12-month "flexible" Brexit delay.
However, on Friday Prime Minister Theresa May formally requested a delay to June 30.
If the European Council meeting on Wednesday does grant either of the two requests we expect Sterling to be supported as it ensures the UK will avoid a 'no deal' Brexit on Friday.
There are however reports France, Belgium and Spain see too much danger to the EU's integrity in offering a long extension, and the three countries are reportedly keen to only offer a short, two week extension that would allow both sides to prepare for a 'no deal'.
When we read this report on Friday night we immediately Tweeted a message to our readers that this is a significantly negative development that means the chance of a 'no deal' Brexit is substantial.
Remember, all 27 EU states have to sign off on whatever deal is offered to the UK and such opposition by core EU members cannot be ignored.
Germany is however reportedly open to Tusk's offer of a flexible extension as they are said to be keen to avoid a 'no deal' at all costs.
We feel that if France, Belgium and Spain win out, the UK parliament will face a crunch vote on Thursday that provides MPs a final chance to approve a deal.
The opportunity for parliament to vote for a delay to Brexit will have been entirely removed by the EU.
Thursday therefore really could be Sterling's 'crunch time'.
Much will of course depend on whether Labour and the Conservatives strike a deal that both parties can support in the House of Commons, if they do and a deal is voted through then we would expect a sharp rally in Sterling.
However, we note entrenched opposition within both the Labour and Conservative parliamentary parties against the two sides working for a deal, so even if a plan is agreed there is no guarantee it would be passed by a rebellious parliament.
On the 'hard data' front, the monthly GDP figure for February is the most important release. Currently no rise - or 0.0% - is forecast, which would mean a significant slowdown from the previous month’s 0.7%.
A slowdown in GDP would likely lead to downwards pressure for the Pound since it would make the UK less attractive to outside investors as a destination to put their capital to work.
GDP is out at 9.30 BST on Wednesday. The year-on-year figure is expected to come out at a higher 1.6%, revealing a better longer-term trend. The 3-month change figure is forecast to show a 0.2% rise, the same as previously.
The other key release is industrial production, out at the same time, and expected to show a -0.1% drop in February, versus the 0.6% rise in the previous month. This is an important contributor to GDP, so the release is also significant for the Pound for the same reasons.
The trade balance is also out at the same time. It showed a -£13.1bn deficit in the previous month of February and this is expected to fall marginally to -£12.8bn in February. Currencies often react to big changes in the trade balance as the market adjusts to a new equilibrium so a better-than-expected recovery might help Sterling and vice-versa for a fall.
Other data releases out at the same time are manufacturing production and construction output which is forecast to show a 0.8% rise, both in February.
The Euro: What to Watch
The main event for the Euro in the week ahead is the meeting of the European Central Bank (ECB) on Wednesday at 12.45 BST, however, the general consensus appears to be that the ECB will keep most of its monetary policy settings unchanged.
The ECB has already put the breaks on when it foresees raising interest rates, pushing back the proposed rate first rate hike to the end of 2019 when previously it had anticipated a hike after the summer of 2019. There is a risk this could be extended even further until the end of Q1 2020, because the minutes showed some of the more dovish members calling for that at the March meeting, however, it's more likely that if the ECB is going to do this it will wait until June, when the Bank releases its new forecasts.
In March the ECB announced it was relaunching TLTROs, which are cheap loans to help support financial institutions (FI). This is unlikely to undergo revision. The new TLTROs (Mrk 3) are scheduled to begin in September 2019. It is taken as a form of de facto easing by the market.
A new idea raised at the March meeting which could be further discussed by the ECB is a ‘tiered rate deposit system’ which consists of the ECB setting a variable deposit rate depending on the health of of the FI.
The scheme was touted as a way to lessen the impact of ultra low deposit rates on bank profitability. Yet, despite being discussed the governing council did not seem able to decide on a way forward and the there are many issues surrounding implementation, including the problem of ‘good banks’ being unfairly punished by a negative deposit rate. The market may well be eying any mention of this in the statement. Yet, it may have more impact on European banking shares than the Euro.
On the 'hard data' front, industrial production data is expected to show a -0.6% drop in February, when it is released on Friday at 10.00 BST. It is a key release as it is an important contributing factor to growth, and growth impacts on GDP, which affects inbound investment and capital flows and therefore demand for, and the value of, the Euro.
German trade data out on Monday morning at 7.00 is also important to gauging the health of the Eurozone economy, especially because of the recent slowdown in exports, which has been one of the contributing factors to the recent slowdown experienced by the German economy.
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