Pound-to-Euro Week Ahead: Charts Still Point Near to Parity but Virus Momentum Sets Direction

- GBP road-blocked on charts by cluster of key levels.

- 200-day average and major Fib level bar path higher.

- Other indicators also point to GBP turn lower this week.

- GBP/EUR charts warn of levels near to parity up ahead.

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- Spot GBP/EUR rate at time of writing: 1.1382
- Bank transfer rates (indicative): 1.1060-1.1140
- FX specialist rates (indicative): 1.1200-1.1256 >> More information

The Pound-to-Euro rate gained half a percent last week but is now road-blocked by technical impediments on the charts that could tip it lower this week, although ongoing hope of a peak in the spread of coronavirus and a fractious European response to the crisis might limit the downside seen by Sterling.

Sterling rose against the Euro, Dollar, Japanese Yen and Swiss Franc last week but ceded ground to riskier rivals like the Aussie and New Zealand Dollars as the mood among investors brightened in response to signs of a slowdown in momentum behind the coronavirus.

A lesser spread of the pneumonia-inducing disease in the U.S. and some major European economies was a boon for risk appetite that benefited the Pound more than the Euro, which put in a sluggish performance last week.

Gains brought the Pound into contact with its 200-day moving average and near to the 61.8% Fibonacci retracement of the 2020 downtrend, both of which offer meaningful resistance. Overcoming those obstacles would require any currency to have strong momentum behind it and Sterling has lost momentum of late, with the Pound-to-Euro rate's relative-strength-index falling throughout last week, while there are also other bearish signals coming off the charts. 

"We look for the market to recover from here," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to the EUR/GBP rate. "We also note TWO 13 counts on the 240 minute chart and a TD perfected set up on the daily chart – they imply the end of the down move. We also note TWO 13 counts on the 240 minute chart and a TD perfected set up on the daily chart – they imply the end of the down move."

Above: Pound-to-Euro rate at daily intervals. Road-blocked by 200-day average and 61.8% Fibonacci retracement at 1.1484. 

The Pound-to-Euro rate has been rising and the EUR/GBP rate falling ever since late March although with momentum waining and resistance barriers littering the path ahead, Commerzbank's Jones says this is likely to be the end of the up-move for Sterling. She's flagged 1.1084 as an important level for both the Euro and Sterling, with a fall below it likely to lead the British currency back toward 1.0840 and afterward; 1.0525. 

Sterling already traded briefly to 1.0525 back in March when the Euro was lifted 6% against the Dollar amid a meltdown in emerging market currencies, although it has only been below that threshold once before during the life of the Euro and Jones is betting the April month will mark a second occasion. She forecasts the Pound-to-Euro rate will fall to 1.02 within the next three weeks, its financial crisis era record low, and remain there for months to come. 

“EUR/GBP continues to probe the 200day MAV at 0.87482, also note that 0.87444 marks the 38.2% Fibonacci retracement level of the Feb-April spike,” says Jeremy Stretch, European head of FX strategy at CIBC Capital Markets. "If we are to break lower and close below these key thresholds we will require either the Eurogroup to fail to come to a positive conclusion as regards as its Covid response or risk dynamics will need to continue to advance, perhaps as a function of signs of a stabilization in Covid infection rates."

The charts are warning of significant downside for the Pound-to-Euro rate this week and through the April month although the trajectory of the exchange rate will be heavily influenced by the general mood among investors, which is itself a function of the momentum behind the coronavirus' advance on the world economy, and increasingly the political backdrop in Europe. European investors will have their first chance to give a verdict on the European fiscal response to the coronavirus crisis Tuesday. 

Above: Pound-to-Euro rate at weekly intervals. Road-blocked by moving averages and 61.8% Fibonacci retracement. 

Squabbles between national leaders over how best to demonstrate the often vaunted European solidarity marred what was otherwise a supportive backdrop for the Euro last week and it cannot be ruled out that disagreements over the response the virus' economic impact will weigh on the currency again this week. 

"Joint debt issuance still appears unlikely leaving it to the ECB support the peripheral debt market with purchases of just over EUR1 trillion this year under their asset purchase programmes. Unless there is a positive surprise today from EU policymakers, the euro is likely to continue to trade on a softer footing amidst the recent improvement in risk sentiment," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG

Eurozone finance ministers reached a last minute agreement Thursday to provide more than €500bn of aid to hard hit economies but the plan needs the unanimous endorsement of national leaders in the European Council and Italy's Prime Minister Guiseppe Conte has indicated he might not support it. The European response to the coronavirus pandemic has become politicised and could weigh periodically on the Euro if it incites Eurosceptic sentiments in the Southern European countries. 

This means the European Council summit where the package will be debated, which looks to be the European Council video conference set for April 23, will be watched closely by the market. In the meantime, the Pound and Euro are likely to take their cues from the daily disclosures of new coronavirus infections and deaths, with investors likely looking to confirm that a 'peak' in the outbreak has been reached in the major European economies and in the U.S. Chinese first quarter GDP data due out at 03:00 on Friday may also matter to the currency market as it could provide an indication of what is ahead for the global economy.

Above: UK Government graph showing daily numbers of new coronavirus infections (green) and deaths. 

"European countries appear to have reached (or may soon reach) peak numbers of new cases, though in other countries things will get worse before they get better. Restrictions on mobility will be required for a while, to reduce the risk of renewed outbreaks. Strong border restrictions will be in place for some time," says Daniel Been, head of FX strategy at ANZ. This, alongside a weak domestic demand backdrop, will weigh on GDP for a number of years."

The daily disclosures will determine the level of risk appetite among investors and in turn, the pecking order for the currency market. This is because momentum behind the spread of infection is key to how soon the so-called lockdowns of people, companies and entire economies can go on for. Pound Sterling can be expected to outperform the Euro and other less risky currencies while the market mood is either sanguine or optimistic about the coronavirus outlook. but underperform if risk appetite takes a knock.

The number of new coronavirus infections rose to 78,991 in the UK on Saturday while the number of deaths rose to 9,875, implying a mortality rate of 12.5%. However, the number of new infections declared each day has continued to trend lower since setting its current peak of more than 5,900 on April 05. Meanwhile, over in continental Europe the number of new infections has also continued to trend lower in Italy, Spain and Germany. 

“Everything during this crisis is moving extremely fast. The spread of the virus, the sudden stop of the economy and market moves. It remains to be seen, however, if this applies to the speed of this recession as well. To prevent a second or third wave of the outbreak, measures could be extended longer, further pressuring economic growth. A recovery is certainly on the table for the second half of the year, although its shape remains uncertain,” says Jeroen Blokland, a multi-asset portfolio manager at Robeco.

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