The Pound-Euro Week Ahead Forecast: Sterling Supported

- GBP/EUR's technical downtrend petering out on charts.
- GBP supported near 1.10 with scope to 1.12 and above.
- USD correlation means 'Fed speak' key in week ahead.

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  • GBP/EUR spot rate at time of writing: 1.1092
  • Bank transfer rate (indicative guide): 1.0852-1.0930
  • FX specialist providers (indicative guide): 1.0975-1.1042
  • More information on FX specialist rates here

The Pound-to-Euro exchange rate signed off with a soft finish to an otherwise strong week Friday but enjoys nearby technical support and could reclaim higher levels alongside the Dollar Index in the coming days, although a looming Federal Reserve speech is a potential banana skin for both. 

Pound Sterling ended third placed in the performance rankings among major currencies last week after ceding ground to only the Japanese Yen and Canadian Dollar while clocking up a half a percent gain over the Euro.

Friday's weakness came after a downbeat update from Brexit negotiators took the earlier strong wind out of Sterling's sails, with familiar differences between the two sides having scuppered progress and left the talks deadlocked again. 

Sterling had been riding high following the release of IHS Markit PMI survey data that surprised on the upside for July, a month that saw the economy all but fully reopened, which had seen the Pound get the better of most major rivals.

Gains and losses left Sterling near the top end of its stiflingly narrow August range against the Euro following a Friday close at 1.1092, although this lengthy consolidation and a sharp reversal off the week's low around 1.1022 have got technical analysts mulling the prospect of a trend change. 

"EURGBP has seen a decisive rejection of resistance at 0.9072 for the completion of a bearish "outside day" to rekindle thoughts of a topping process," says David Sneddon, a managing director and head of technical analysis at Credit Suisse.

0.9072 resistance for EUR/GBP translates into support at 1.1022 in GBP/EUR. 

Above: Pound-to-Euro rate shown at daily intervals with Fibonacci retracements of April capitulation lower. 

Sterling may have scope to inch past 1.11 and target 1.12 in the coming days although Sneddon says overcoming 1.1189 is key to signalling that a technical bottom has formed under GBP/EUR. 

"EUR/GBP has failed at the 4 month resistance line, charted an outside day to the downside and eroded the support line. The low from the 11th August at 0.8969 is exposed," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank

0.8969 in EUR/GBP translates into a potential upside target for the Pound-Euro rate at 1.1149.

Jones' short-term technical outlook is neutralising from negative and accordingly, her approach to the Pound-to-Euro rate has turned sunnier. She and the Commerzbank team had been betting on further declines in the exchange rate but advocated last week that clients flip from 'short' to 'long' upon any rally up to 1.1080, which it did do early in the week. 

They say that any daily close above 1.1149 would clear the way for a challenge of 1.1196 and then 1.1281. If you would like to book in an exchange rate around current levels for use at a future date to protect your international payments budget, or would like to automatically book a higher or lower rate should it be achieved, we would suggest investigating the tools at your disposal.

"The GBP has been threatening to break higher over the past week supported by the stronger data flow from the UK. It helped to lift cable to an intra-day high of 1.3267 on 19th August which was the highest level since the start of this year. EUR/GBP also fell to its lowest level since 10th July at 0.8944," says Lee Hardman, a currency analyst at MUFG. "Improving UK cyclical momentum should continue to encourage a stronger GBP in the near-term especially against the EUR although gains may prove short-lived."

Hardman and the MUFG team say there will come a time when the absence of progress in the Brexit trade talks likely weighs on the Pound but that for now, Sterling has the economic and fundamental winds in its sails while the oversold U.S. Dollar could be due a correction.

Improving UK PMI surveys came alongside disappointing European numbers that questioned the nascent Eurozone economic performance and prompted the market to reconsider its aversion to the Dollar, which many see having scope to correct higher in the coming days.

If Sterling is able to shake off its Brexit blues, then recent correlations suggest it could follow the greenback higher but both will be at risk from central bank speeches this week.

Looking at the week ahead, markets don't have much to consider by way of economic data releases.

"This week’s sparse economic data calendar has a distinct late-August feel. There are a number of releases in the US that may interest markets but elsewhere it seems set to be very quiet. That suggests the focus will remain on coronavirus news and particularly the latest evidence on European trends. Also likely to command attention is the Kansas City Fed’s annual economics symposium, which will include talks from US Fed Chair Powell and Bank of England Governor Bailey," says Rhys Herbert, an economist at Lloyds Bank.

A highlight of the coming week will be U.S. Federal Reserve Chairman Jerome Powell's address to a virtual audience at the Jackson Hole Symposium around 14:10 Thursday, and while its 'framework review' and increasingly "symmetrical" view of the inflation target are a likely focus of the market, and a Dollar-bearish one at that, the greenback and markets may also be sensitive to comments about the long-term implications of the coronavirus crisis for the bank's monetary policy toolbox. 

Above: Pound-to-Euro rate shown at monthly intervals alongside Dollar Index (black line, left axis). 

The unprecedented amounts of new money created to fund extraordinary policy supports for the economy could forever have changed the way the Fed combats crises and in a manner that sees future balance sheet expansions working their way more effectively and directly into the real economy.

From corporate bond purchases to government bond buys that are closely coordinated with Treasury fiscal plans, the Fed's new policy bag is a Dollar bearish one and should Powell delve into this subject on Thursday then he might ensure a soft finish to the week for the greenback as well as Pound-to-Euro rate.

The same is true of other central banks including the Bank of England (BoE), which has dispatched Governor Andrew Bailey to Jackson Hole where he'll address an audience around 14:05 Friday.

Sterling will be listening keenly for clues about how the BoE's policy stance could change in the months ahead.

"Governor Bailey won't escape Jackson Hole without addressing questions around negative rates. The MPC approved negative rates as a credible policy tool at the August meeting but remained hesitant on using further rate cuts in the near future. Governor Baley will likely reiterate this view. We ourselves don't see negative rates or further rate cuts happening this year. But depending on the economy's progress, rate cuts could become more of a talking point next year when the banking environment may be better and the MPC has a better view of slack in the UK economy. For now, the upward surprises in data—both activity (Q2 GDP, June GDP, July retail sales) and inflation—should keep policy unchanged with the Governor sounding broadly neutral on the policy outlook," says Sanjay Raja, an economist at Deutsche Bank

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