Pound Sterling / Euro Week Ahead Forecast: Bullish Continuation Pattern Suggestive of Mild Upside Risks
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- GBP/EUR shows bullish continuation formation
- Targets situated above long-term range
- Pound to be driven by BOE meeting and opinion polls
- Euro by EU economic forecasts
The Pound-to-Euro exchange rate is trading at around 1.1603 at the start of the new week after rising 0.87% in the week before. Studies of the charts show the pair trading sideways in a bullish continuation pattern at the top of a longterm range.
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 formed a bullish continuation pattern called a ‘pennant’ after touching the top of a multi-year range.
If the exchange rate can successfully rise above the top of the pennant, situated at the 1.1661 October 17 high, it will probably confirm a continuation of the bullish trend higher to a target at 1.1800 initially, and then perhaps 1.1915.
Although momentum is declining and suggests a more bearish outlook it is not a game-changer.
The top of the range is a tough ceiling for the exchange rate to crack so our bullish forecast is dependent on a break to new highs.
The daily chart shows the pennant pattern more clearly and its potential upside target at 1.2200.
Pennant patterns get their name from the triangular flags which used to fly from castles in medieval times.
The triangular pennant shape is preceded by a steep rally which is called the ‘pole’ - like a flag pole. The length of the pole is then used as a measurement guide for the subsequent rally. Normally, an extension of either 61.8% of the length of the pole or the same length (100%) is expected.
In the example above this gives a target at either 1.1915 (61.8%) or 1.2200 (100%).
The daily chart is used to analyse the medium-term trend, which is the next week to month of price action.
The weekly chart shows the pair is currently bumping up against tough resistance from the 200-week moving average (MA) and the long-term range highs.
The combination of these two is quite strong and only a clear break above the 1.1661 highs would provide confirmation of a continuation to the upside.
Such a move could see an extension of the uptrend to a long-term target of, perhaps, 1.2200, as suggested by the bull pennant on the daily chart.
The 1.20s represents a long-term equilibrium point for the exchange rate and gains above it will be more difficult to come by.
At that level, there is an increased risk of a pull-back and sideways range evolving, over the long-term, defined as the next few months, which is the time-frame that the weekly chart is used to analyse.
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The Pound: Watching the Polls and Bank of England
The main event for the Pound in the week ahead will probably be the Bank of England (BOE) meeting on Thursday, Services PMI data on Tuesday, and the results of opinion polls in the run-up to the December general election.
The BOE is not expected to announce a change in policy or interest rate settings when it ends its meeting at 12.00 BST on Thursday, but there is growing speculation the accompanying statement from the bank may hint at a shift to a more neutral stance due to weaker growth.
“There is a lot of speculation that the BOE will finally give up its tightening bias at its next meeting, and although they are unlikely to signal an easing bias they will probably adopt a more neutral stance, because it is not just Brexit that is weighing on the UK economy we also have the global slowdown, and the UK economy is struggling as a result,” says Raffi Boyadijian, senior investment analyst at FX broker XM.com
The key data release of the coming week is October Services PMI which is forecast to show a slight rise to 49.7 from 49.5 when it is released on Tuesday at 9.30 BST.
Recent Manufacturing PMI for October was better-than-expected but analysts dismissed the result as caused by one-off factors due to stockpiling ahead of the October 31 Brexit deadline.
It may be that Services, therefore, can provide a more accurate gauge of activity in the economy in October since it would probably not be subject to the same ‘stockpiling’ bias as manufacturing.
A higher than expected reading should be taken as positive or bullish for Sterling, while a lower than expected reading should be taken as negative or bearish for the Pound.
Financial markets now see opinion polls as the main barometer to watch in terms of gauging Brexit outcomes which means any major swings in polls could impact on Sterling.
The latest opinion poll in the Observer shows Boris Johnson’s Conservatives in a comfortable 16 point lead on 42%, Labour lagging on 26%, the Brexit party seeing their vote shrink to only 9.%, whilst the Liberal Democrats are on 16%.
The larger the Conservative lead, the better for the Pound, as it suggests Johnson will win with a comfortable majority and can pass his deal unimpeded.
How these percentages translate into actual seats, however, is more difficult to forecast. This is due to the ‘first past the post’ electoral system used in the UK in which MP’s fight over seats individually rather than gaining a representative share of the broad national vote.
The Euro: What to Watch
The main drivers of the Euro in the week ahead are the EU’s official winter economic forecasts on Thursday, ahead of the Eurogroup meeting of finance ministers, and retail sales data out on Wednesday.
The EU’s previous official forecast for euro area GDP growth, released in the summer, estimated growth of 1.2% in 2019 - unchanged from the previous estimate - a slightly lower 1.4% in 2020.
The GDP forecast for the whole of the EU stayed unchanged at 1.4% in 2019 and 1.6% in 2020 in the summer.
Substantial deviations in the winter release from these estimates are not expected but might result in fluctuations in the Euro.
A higher forecast would support the currency and vice versa for a lower forecast. The forecasts are released at 6.00 BST on Thursday.
Eurozone retail sales for September is expected to show a rise of 0.1% from the month before when released at 10.00 on Wednesday.
A higher-than-expected reading should be taken as positive or bullish for the Euro, while a lower than expected reading should be taken as negative or bearish for the Euro.
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