British Pound vs. Euro Exchange Rate Week Ahead Forecast: Firm Start but Predisposed to Further Weakness
Image © IRStone, Adobe Stock
- Pound opens new week firmer
- GBP/EUR is still fragile as it is below 1.1600
- Pair could be forming bearish topping pattern
- Pound to be driven by BOE meeting; Euro by GDP
The Pound-to-Euro exchange rate trades higher at the start of the new week having been quoted at 1.1592 at the time of writing.
The week ahead will be a relatively busy one for Sterling owing to the Bank of England policy meeting and Inflation Report on Thursday. Also on Thursday are local government elections where Prime Minister Theresa May's Conservatives are widely expected to suffer a drubbing.
The Pound remains a politically-charged currency and therefore the implications for May's leadership of a heavy defeat for the Conservatives could have implications for the currnecy.
From a technical perspective, the decline below the key 1.1600 range highs has changed the outlook from 2019's bullish feel to a more neutral one.
The pair experienced four down-weeks in a row following the March peak which is a negative sign that predisposes it to further weakness.
Downside momentum, however, as measured by RSI, is not particularly strong, either on the weekly or daily charts, suggesting a risk that the move lower in April may simply be a pull-back rather than a reversal.
The pattern which has formed at the highs on the daily chart is quite probably of a topping variety. It looks like a bearish double top or a fulcrum. A break below the 1.1463, March 21 lows - or the pattern ‘neckline’ - would supply confirmation of more downside.
Such a break would probably herald a deeper decline to the next major target at 1.1350 where the 50-week MA is situated and likely to provide support. This could happen in the next 1-3 weeks.
The pair rose back up towards the 1.1600 range highs again last week. It established a set of higher highs and lows on the 4hr chart in the process. If it breaks above the 1.1595 highs it will establish another set of higher highs and lows, which would provide evidence of a reversal in the trend.
Although a break back above these highs would potentially flip the trend bullish again, the the 50-day MA at 1.1612 would probably provide fierce resistance requiring a clear break above - confirmed by a move above 1.1640 - to establish a new uptrend, targeting 1.1700 initially. This could happen in the next 1-2 weeks.
Of course a break above the 1.1802 highs would be an even stronger bullish sign and would probably confirm a continuation up to a target at 1.1930, at the 200-week MA. This could well happen over a 1-5 month time horizon.
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The Pound: What to Watch This Week
The main event for the Pound is the Bank of England (BOE) rate meeting which will end with an announcement on Thursday at 12.00 BST.
The BOE is not expected to raise interest rates at the meeting despite robust economic data. Actual growth remains subdued at 1.2% (the weakest since 2009) due to business uncertainty going "through the roof" because of Brexit, so it is unlikely the Bank will want to change rates until after more clarity emerges.
Despite talk of a ‘grab and go’ rate hike in August, Reuters polls forecast rates will not move until early 2020, a calendar quarter later than was forecast a month ago.
The hunt for a new governor to replace Carney in October adds more uncertainty to the mix.
The BOE will publish its quarterly inflation report at the May meeting which includes the latest economic projections, and this is likely to garner more attention than usual - and possibly produce more volatility.
The pound is unlikely to see a big reaction to the BOE decision but any dovish tilt by the Bank - dovish meaning in favour of lower interest rates - could weigh on Sterling, which slipped to 10-week lows versus the US dollar this week.
Lower interest rates or the threat of them can be negative for a currency because they detract from foreign investment inflows, which tend to favour jurisdictions which can offer higher interest returns.
Local Elections
Thursday could see the ruling Conservative Party lose up to 1000 council seats amidst wide-spread voter unhappiness over the government's inability to deliver Brexit.
Council elections are not typically of interest to currency markets, however because the position of Prime Minister Theresa May is so precarious at this point, the outcome of the polls will be closely watched with a heavy defeat raising questions as to how much longer she can hold onto her position.
"Local elections on Thursday will be the latest barometer of the damage to Conservative support being done by the Brexit shambles. Comparisons with the last elections in the same seats (2015) are complicated by boundary changes, but this was a high watermark for the Tory support compared to their current poll ratings and significant losses are likely," says Adam Cole, a foreign exchange analyst with RBC Capital Markets.
"The immediate implications for GBP will depend May’s prospects for surviving as PM, with imminent change (Johnson is runaway favourite to replace her) lifting political uncertainty further," says Cole.
PMI Data
The other major release in the coming week are the release of PMIs for April. These may be closely watched as they recently declined in contraction territory which is defined as a reading below 50. They are seen as a forward indicator for the economy so this raised concerns softer official economic data is coming.
Although official UK data has not yet followed in their footsteps, another gloomy set of PMIs could increase the risk it will.
The Manufacturing PMI is out on Wednesday at 09:30 B.S.T.
In March the PMI rose because of stockpiling by companies preparing for a potentially distruptive Brexit, rather than due to genuine growth. The number expected by markets is 53.2, down from the previous month's 55.1.
Construction PMI fell to 49.7 in March and is forecast to rebound to 50.4 in April when data is released at 9.30 on Thursday.
UK services PMI is the big number to watch as this is a sector that accounts for over 80% of UK economic activity.
The previous month saw the Service PMI plunge below 50 and into contractionary territory in March, falling to 48.9, but data out on Friday at 9.30 is expected to show a rebound to 50.4 in April. If it disappoints the Pound could suffer.
Brexit Impasse Continues
Brexit could also still be a driver of the Pound in the week ahead. Talks between the government and the opposition Labour party have not reportedly made much progress. At the same time pressure is building on the Prime Minister, Theresa May, to resign. If she does go, the Pound will weaken.
On the other hand, the announcement of a joint deal with Labour could lead the way to a stronger Pound. Yet this seems unlikely given the UK’s adversarial political system which does not favour bi-partisanship.
There seems little incentive for Labour to help the Conservatives out of their current self-destructive, death-spin over Europe. If anything there is probably more chance of greater uncertainty in the short-term, not less, as Corbyn is more likely to bide his time and watch the Conservatives be their worst enemy than help Theresa May out of her current deadlock.
The Euro: What to Watch
The main event for the Euro in the week ahead is the preliminary estimate of GDP growth on Tuesday at 10.00 BST.
Those expecting a result in line with those of the U.S. and China, which both showed strong upside surprises recently, may be in for a disappointment. Growth in the Eurozone is not forecast to rise at the same rate.
On a yearly basis it is only expected to rise by 1.1% in Q1 compared to a year ago, and by 0.3% from 0.2% previously on a quarterly basis.
“A worse figure such as no growth during the period would deepen the pessimism for the Eurozone economy,” says Raffi Boyadijian, an economist at FX broker XM.com.
Business confidence data out on Monday at 10.00 is a key release for the Euro. It is expected to come out at 0.49 from 0.53 previously.
Eurozone March unemployment is expected to remain unchanged at 7.8% when it is released at 10.00, on Tuesday. Employment has been a relative strength for the Eurozone so a deterioration would deepen concerns about the region.
The flash inflation reading for April will be released on Friday, along with March producer prices. Inflation is expected to rise to 1.6% and 1.1% for broad and core readings, up from 1.4% and 0.8% respectively.
Inflation informs the level the European Central Bank (ECB) sets interest rates at which has a significant impact on the Euro. Higher interest rates or the expectation thereof tends to support the Euro whilst vice-versa for lower rates.
“A combination of disappointing GDP and inflation prints would be the worst outcome for the euro, which crumbled below its key support around $1.1180 this week,” says Boyadijian.
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