Your Pound-to-Euro Exchange Rate 5-Day Forecast: Staying Under Pressure, Sideways Action Possible Near-Term
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- GBP/EUR downtrend will probably extend
- Short period of sideways activity possible
- Euro and Pound both beset by soft data at start of the new week
The British Pound opens the new week higher against the Euro, with the GBP/EUR exchange rate quoted at 1.1189 at the time of writing on Monday, broadly unchanged on the previous week's close with both the Euro and Pound seeing some underwhelming data.
The Euro was subject to some disappointing German manufacturing data, while the UK Manufacturing PMI read at its worst level in six years suggesting the sector's slump is becoming increasingly entrenched.
Concerning the near-term outlook, our studies of the charts suggest there remains a bearish bias and the GBP/EUR exchange rate is set to continue its downtrend in the coming days.
The 4-hour chart shows the pair in a steady downtrend and given the old adage that “the trend is your friend,” it is expected to continue.
The pair will probably continue declining after a short period of sideways activity in a range roughly between 1.1120 and 1.1190.
The main reason for expecting some range-trading is that the RSI momentum indicator is converging with price action. This occurs when price makes a new low but momentum does not mirror it. This happened on Friday, June 28, when price made a new low at 1.1121 but momentum did not. The convergence was an early warning of the bounce that occurred after the new low.
The S1 monthly pivot at 1.1125 is a mild support level. Monthly pivots are a reference point used by professional traders both as a gauge of the trend and as a support or resistance level in themselves.
A break below 1.1115 would provide confirmation the pivot was broken and the downtrend was set to continue. Such a move would be expected to reach 1.1050 in the week ahead.
The 4hr-chart is used to analyse the short-term trend, which means the trend over the next 5 days or week.
The daily chart shows the pair in a long-term downtrend which is likely to range trade for a short while before extending down towards an eventual target at 1.1000.
The 1.1000 target is at the bottom of a long-term range so the pair is likely to stall or pause at that level.
The RSI is converging with price suggesting the pair will probably pull-back first or go sideways for a while before resuming its downtrend.
The 50-day moving average (MA) has crossed below the 200-day MA, which is another bearish signal (circled).
The daily chart is used to indicate the medium-term outlook which includes the next week to a month ahead.
The weekly chart shows the pair in an uninterrupted 8 week downtrend within a longer-term sideways range.
In the long-term the pair will probably touch down at the 1.1000 range lows, and then bounce, continuing to unfold within the parameters of its sideways trend.
One possible upside target after the pair has bounced is the 1.1125 support level it recently bounced off and this provides an initial upside target for the pair.
We use the weekly chart to give us an idea of the longer-term outlook which includes the next few months.
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The Pound: PMI Season Gets off to a Bad Start
The main releases for the Pound are services, manufacturing and construction PMIs for the month of June. These are surveys of purchasing managers in key sectors and come out at the start of every new month.
Manufacturing PMI data out Monday read at 48, well below the 49.2 that foreign exchange markets were expecting: currencies tend to react to sizeable surprises in economic data and it is therefore little surprise that the Pound fell on the release.
Business optimism dipped to its third-lowest level in the series history during June.
Furthermore, employment fell for the third straight month in June, with job losses seen in the intermediate and investment goods sectors.
There is evidence that the global slowdown in manufacturing is also playing a sizeable role in the UK slowdown.
"Demand from the domestic market weakened, while the additional constraint of slower global economic growth meant new export business fell at one of the fastest rates since late-2014," says Rob Dobson, Director at IHS Markit.
The Construction PMI is forecast to show a rise to 49.4 from 48.6 in June when it is released at 9.30 on Tuesday.
The Services PMI is expected to show no change at 51.0 in June when it is released at 9.30 on Wednesday.
A lower-than-expected reading would probably result in a decline in the Pound and vice versa for a higher-than-expected result.
The Conservative party leadership race is likely to have less of an impact on Sterling in the coming week as the final vote on who will get the job will not take place until mid-July, with the new leader named on July 23. Apart from that, there is a debate on ITV on July 9.
Boris Johnson is still the bookies favourite with 1/7 (87.7%) odds according to Oddschecker. He is the 'harder' Brexiteer of the two by doggedly adhering to the October 31 deadline ‘come what may’. If his popularity should wane it would boost the Pound, but we doubt Johnson will be threatened by Jeremy Hunt.
We will monitor newswires for any comments from Johnson pertaining to Brexit, believing this to be the key driver of Sterling direction over coming days and weeks.
The Euro: Manufacturing and Unemployment Data in Focus
The week got off to a relatively poor start for Euro watchers with manufacturing numbers from across the Eurozone disappointing.
The second release of the June German Manufacturing PMI read at 45, disappointing markets which expected a more robust reading of 45.4.
A reading below 50 suggests the sector is in contraction, therefore the data will only cement concerns that the German economy is in the midst of a protracted slowdown. "Germany's manufacturing PMI remains well inside contraction territory as the sector continues to suffer in the face of global trade tensions, an autos slowdown and lingering uncertainty," says Phil Smith, Principal Economist at IHS Markit.
The French headlines were revised down to 51.9 while separate data in Spain and Italy were poor.
The Spanish PMI slid to 47.9, from 50.1 in May, while the Italian index slumped to 48.4, down from 49.7 in the month before.
"Another grim set of manufacturing data in the Eurozone," says Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics. "New orders fell for a ninth month running, driving down production, forcing firms to eat into existing work backlogs to ward off the worst of the slowdown in output. Needless to say, this trend is not sustainable amid still-falling new orders, warning of downside risks to production growth. In addition, the broad-based slowdown is now eating into the labour market; manufacturers in Spain, Italy and Germany all recorded falling employment."
Eurozone unemployment was also released on Monday at 10.00 BST and the data was surprisingly upbeat: headline unemployment in the Eurozone fell 7.5%, from 7.6% in April, coming in below consensus expectations for a reading of 7.6% to be delivered.
"A great, and slightly surprising headline, given the small increase in the headline national German jobless rate in May," says Vistesen.
Unemployment in Germany was unchanged 3.1%, in France it was unchanged at cyclical lows at 8.6%.
In Italy and Spain unemployment fell to 9.9% and 13.6% respectively.
Ireland saw unemployment fall to 4.4% from 4.6% in April.
"In total, these numbers look great, but we fear the good news won’t persist. Especially, the German and Italian data are under threat of a reversal in the next six months given the significant slowdown in their economies in the past six-to-12 months. That said, in the EZ as a whole, growth should remain strong enough to drive the unemployment rate down further in the next six months, by 0.1-to-0.2 tenth of a percentage point," says Vistesen.
Looking ahead, Eurozone retail sales is expected to show a rise of 0.4% in May (mom) when it is released on Thursday at 10.00 BST. This would mark an improvement from the -0.4% registered in April.
German factory orders and industrial production are forecast to show a -0.2% and -0.4% fall (mom) in May when they are released on Friday at 7.00 BST. For factory orders this would constitute a slowdown from the 0.3% previously and for industrial production a -1.9% decline previously.
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