Pound-to-Euro Exchange Rate Week Ahead Forecast: Established Downtrend to Continue
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- GBP/EUR to continue falling as bear trend steepens
- Break below August lows opens up further declines
- Pound Sterling to be moved by labour, inflation and retail sales data;
- Euro by industrial production and ZEW
The Pound-to-Euro exchange rate is trading at around 1.0639 at the start of the new week after falling 2.61% in the week before.
Pound Sterling has now clocked up 14 successive weeks of decline, and in the process extending a record-breaking spell of weakness against the single-currency.
Momentum is clearly negative, and our technical studies of the charts suggest the pair will probably continue falling in the coming days.
The 4-hour chart - used to determine the short-term outlook, which means the coming week or next 5 days - shows how the pair has broken suddenly and dramatically below the August 2018 lows. This is a significant break which could well open the way to even deeper declines in the weeks to come.
There is now little support in the way of deeper declines and a break below the 1.0615 level would signal a probable continuation down to the next target at 1.0500.
1.0500 is a major round number level where many traders are likely to be tempted to take profit on their bearish bets, thereby increasing supply at that level, and probably leading to a pause in the decline.
The daily chart tells a similar story only over a longer timeframe. It shows the pair in a steep downtrend which particularly picked up momentum in the final day of last week.
Given the old adage that ‘the trend is your friend’ we expect the current downtrend to keep extending.
A break below 1.0615 would confirm a continuation lower to a target at 1.0500 initially, followed by 1.0305 where the S3 monthly pivot is situated, a line of support calculated from the previous monthly data, which professional traders, in particular, watch.
At that level, the pair will probably stall, bounce and go sideways for a time.
The daily chart is used to analyse the outlook in the medium-term which is defined as the next week to month ahead.
The weekly chart - used to analyse the long-term trend, defined as the next several months of market action - shows how the established downtrend is steepening.
Last week was one of the longest down-weeks for a long time and this increases the bearish outlook.
The pair has almost touched the longer-term target based on the evidence on the weekly chart at 1.0620, which is the 61.8% extrapolation of the height of the range (labeled ‘x’).
The strength and speed of the downtrend makes us believe the pair will probably go even lower in the coming months.
A break below 1.615 would help confirm more downside to 1.0500, 1.0305 and ultimately 1.000 (parity), over the long term.
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The Pound: Slew of Data on Tap
The main drivers of the Pound in the coming week are likely to be Brexit politics, employment data on Tuesday, inflation data on Wednesday and retail sales on Thursday.
We note Brexit sentiment to be the overriding driver of Sterling: the market is in an ongoing process to lighten exposure to Sterling amidst rising expectations that the EU and UK will part ways without a deal on October 31.
“The Brexit story is by far the most important driver for the currency. The logic behind this is quite simple: if you manage to solve the political crisis most of the economic problems go away as well, investment picks up, uncertainty dissipates and growth reaccelerates,” says Marios Hadjikyriacos, an investment analysts at XM.com.
The only thing which can stop the Brexit juggernaut from going over the cliff now is a general election, however, this is unlikely to happen until after the summer recess in September, “so there is very little prospect for a rebound in the Pound over the next month, at least,” adds Hadjikyriacos.
But, the sharp drop in Sterling in response to last week's poor GDP reading served as a reminder that markets are still watching economic data.
Indeed, news that the UK economy shrank 0.2% in the second quarter of 2019 suggests that the economy - long a source of support for the Pound - is starting to flag.
We could see further selling triggered by any disappointing data readings this week.
We are particularly wary of a poor print in the wage growth data out on Tuesday.
Labour market data is forecast to show the claimant count rising by 42k in July, the unemployment rate staying at 3.8%, and average wages including bonuses rising 3.7%, when released at 9.30 BST on Tuesday.
3.7% is a fast rate for wages to be rising and ordinarily would lead to increased expectations the Bank of England (BOE) might have to intervene to cool down the economy by raising interest rates, however, this is unlikely to be the case, given the recent poor growth data and backdrop of Brexit risks.
Inflation data is expected to show a 1.9% rise in July compared to a year ago when it is released at 9.30 on Wednesday, which is almost exactly on the 2.0% BOE target rate.
Retail sales is forecast to show a -0.3% fall in July compared to the previous month when released at 9.30 on Thursday, and a 2.6% rise compared to a year ago. Both would mark a slowdown from the 1.0% and 3.7% in June.
If data comes out in line with market expectations it will probably lead to a stabilisation in the Pound, since it will reflect an economy growing at about the ‘right’ pace - or the goldilocks level, as economists are fond of calling it.
“The U.K. economy has shown varying goldilocks elements in recent months, and all three data bowls of economic porridge may be on display next week. Wage growth is, perhaps, in the “too hot” category, with average weekly earnings forecast to quicken further to 3.7% year-over-year for Q2...July retail sales are forecast to fall 0.3% month-over-month, which would be the third decline in the past four months...Finally, July CPI inflation released next week will likely remain close to the “just right” category...We believe the Bank of England is likely to remain on hold for some time,” says Wells Fargo in a preview note.
Given the surprising -0.2% slowdown in GDP growth which pushed the Pound down on Friday, there is a possibility the slowdown could be reflected in slightly worse than expected economic data in the week ahead, and if so the Pound could take a further hit.
The Euro: Industrial Production and German Sentimenrt in Focus
The main economic data releases for the Euro in the week ahead is industrial production on Wednesday and the ZEW economic sentiment index out on Tuesday.
Eurozone industrial production is forecast to show a -1.4% decline compared to a month ago in June when it is released on Wednesday at 10.00 BST; this would mark a substantial slowdown from May when it grew by 0.9%.
Industrial production is an indicator of growth and impacts on GDP expectations. There is a risk it could be lower-than-expected given the general backdrop of a slowing global economy, and if so the Euro is likely to weaken - if higher than expected, it could recover.
The other key data release is the ZEW economic sentiment index, which is a survey-based indicator often cited as a reliable leading indicator of broader growth.
The ZEW is forecast to fall to -21.7 in August from -20.3 in July. This would signal a more pessimistic mood amongst the financial professionals interviewed for the survey and probably slower growth in the future.
A higher than expected reading should be taken as positive/bullish for the Euro, while a lower than expected reading should be taken as negative/bearish for the Euro.
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