Pound-to-Euro Exchange Rate 5-Day Forecast: Range-Bound with Bearish Bias, GDP Data is Key Data Release
Image © European Central Bank
- GBP/EUR to continue sideways, risk of break lower
- Long-term floor at 1.1000 still beckons
- Pound to be driven by politics, GDP release
- Euro eyes ECB minutes
Pound Sterling is trading at around €1.1138 at the start of the new week, after recoding its ninth consecutive weeks of declines in the week prior. Studies of the charts suggest the pair will probably go sideways over coming days but owing to the overriding negative trend it will come as little surprise to readers to hear that the risks remain skewed to the downside.
The 4-hour chart - used to analyse the short-term trend, which means the trend over the next 5 days or week - shows the GBP/EUR exchange rate having entered a sideways trend after previously declining.
This sideways trend is expected to continue.
Given the overarching downtrend on the daily and weekly charts, however, there is a risk of a breakout from the range lower to a downside target at 1.1050. A break below 1.1115 would provide confirmation for a continuation lower.
Although looking less likely - a break above 1.1210 would negate the bearish theme and confirm a move up to a target 1.1250.
The daily chart - used to indicate the medium-term outlook which includes the next week to a month ahead - shows the pair in a long-term downtrend which is likely to pause and go sideways for a while before resuming down to an eventual target at 1.1000.
The 1.1000 target is at the bottom of a long-term range.
The weekly chart shows the pair in an uninterrupted 9 week downtrend within a longer-term sideways range.
In the long-term, the pair will probably touch down at the 1.1000 range lows before bouncing and continuing to unfold within the range.
A bounce off the floor would probably lead to a move up to 1.1200 - or higher depending on the speed of the recovery.
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: Politics Remains Central Driver, GDP Data Eyed
The main driver of the Pound in the week ahead is likely to be political uncertainty.
It will probably trade with a downside bias as a result of rumours the next leader of the Conservative party - in all probability Boris Johnson - will face little choice but to call a snap General Election before 2019 is out if he is to have any chance of passing a negotiated Brexit deal through parliament.
Expectations for the Conservative's wafer-thin majority to be overturned in the event Johnson tries to lead the UK into a 'no deal' exit from the EU would leave the fresh Prime Minister with little choice but hope that the country will back him in another vote.
However, General Elections usually result in more political uncertainty and weaken the Pound, so the outlook is overall bearish from a fundamental point of view.
We will be watching for further developments on this front over coming days, while keeping an ear on Johnson's campaign for suggestions as to how he might deliver Brexit.
The main economic driver is GDP data for May, which is expected to show a rebound of 0.3% after a negative growth rate in April.
UK economic growth is a key driver of the Pound as it influences capital inflows and a worse-than-expected result could impact negatively on the already vulnerable Pound.
“The economy probably underperformed its European partners in the second quarter as the Brexit extension has only prolonged the period of uncertainty for British businesses. UK GDP shrank by 0.4% month-on-month in April and data due on Wednesday is forecast to show GDP recovering by 0.3% in May,” says Raffi Boyadijian, an economist at XM.com.
The other main data releases for Sterling are industrial and manufacturing production in May, which are likely to show positive recoveries as April’s stats were kept ‘artificially’ low due to one-off factors.
“Both industrial and manufacturing output also slumped in April as firms sought to run down the large stockpiles they built in the prior month. In May, they’re expected to have rebounded by 1.5% and 2.5% m/m, respectively.”
All the major data releases are scheduled for release on Wednesday, July 10 and 9.30 BST.
The Euro: What to Watch
The main release for the Euro in the coming week will most probably be the release of the minutes of the June European Central Bank (ECB) meeting which will be scrutinised for signs of what the ECB’s future policies are likely to be.
Analysts will mostly be looking for signs that more members of the governing council are calling for an increase in monetary policy stimulus.
If so, then the Euro will weaken.
“At the June meeting, the ECB refrained from adopting a clear loosening bias even though President Draghi did say some members raised the possibility of a rate cut. The account of that meeting, to be published on Thursday, should provide some insight into those discussions,” says Raffi Boyadijian, an analyst with XM.com. “Although there have been several signals since the June meeting, including from Draghi himself, that additional stimulus may be on the cards, a dovish account could still pressure the euro, which this week slipped back below $1.13 on declining Eurozone bond yields.”
The minutes are scheduled for release at 12.30 BST on Thursday, July 11.
The other main data release for the single currency is industrial production both in Germany (on Monday) and then for the whole of the Eurozone, on Friday.
The current downturn in the Euro-area economy has been mainly driven by a slowdown in Manufacturing.
“The slowdown in the Eurozone economy has been defined by a lagging manufacturing sector and a resilient service sector. This is perhaps best illustrated in Germany, Europe’s biggest economy and manufacturing powerhouse. Factory orders in Germany are contracting at a pace not seen since the Great Recession,” says a weekly economics preview from investment bank Wells Fargo.
German industrial production is forecast to show a 0.4% rise in May after a contraction in April, when it is released at 7.00 BST.
Eurozone-wide is forecast to show a 0.2% rise when it is released at 10.00 BST, on Friday.
“On a year-over-year basis, industrial production was down 0.4% in April, but this small decline masks worrying trends in the details. Capital goods and durable consumer goods production were down 1.2% and 0.8%, respectively, partially made up for by growth in non-durable goods. Another decline in industrial output broadly and cyclically-sensitive sectors specifically would be a poor sign for the Eurozone economy,” says Wells Fargo.
Such a decline would also, probably weigh on the Euro.
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