Pound-Euro Rate Week Ahead Forecast: Six Month High in Sight

- GBP/EUR upside limited to 1.1344 according to charts
- Eyes on Sunak's budget review midweek
- Support seen offered by 1.1031 as risk of a setback builds.
- Brexit talks continue as EU mulls "provisional application." 

Above: File image of Chancellor Rishi Sunak. Picture by Pippa Fowles / No 10 Downing Street.

• GBP/EUR spot rate at time of publication: 1.1201
• Bank transfer rate (indicative guide): 1.0913-1.0991
• FX specialist providers (indicative guide): 1.1037-1.1104
• More information on FX specialist rates here

The Pound-to-Euro exchange rate starts the new week above 1.12 and has scope to edge up to six-month highs over the coming days as Brexit talks look set to continue in the background for at least another week leaving Sterling at risk of a setback on any negative headlines, while domestic spending pledges from the UK Chancellor Rishi Sunak will dominate the domestic agenda. 

Sterling advanced on a faltering Euro as well as most its major rivals last week as Brexit negotiators continued to work toward a deal despite Thursday's lapsed deadline, leading the Pound-to-Euro rate back up to the 1.12 handle.

Hope of an agreement remained elevated last week and it now appears that negotiators could have more time to clinch a deal than was previously thought with EU ambassadors reported to be mulling on Friday the idea of "provisional application" for any last minute Brexit deal.

That would see an agreement implemented in part without having been ratified in each member state's parliament, according to a report from RTSE's Europe editor Tony Connelly, although the two sides remained deadlocked last week over the so-called level playing field, fisheries access and enforcement mechanisms for any deal.

7/ Another standout element of today's briefing is that officials are considering Provision Application of the agreement because time is diminishing so fast, ie that an agreement wd provisionally come into effect on Jan 1 but that all the ratification procedures wd happen after

— Tony Connelly (@tconnellyRTE) November 20, 2020

With negotiators still at the table the Brexit talks could take a back seat this week absent any breakdown or surprise announcement of progress, leaving Sterling to focus on domestic coronavirus developments, an update on HM Treasury's spending plans, economic data and global market sentiment. 

"We continue to expect a deal to be reached in the coming weeks – if not days," says Sanjay Raja, an economist at Deutsche Bank. ""For now, the Chancellor will likely shelve many of the tough decisions facing the UK public finances, from a longer-term spending plan to the sustainability of the public finances." 

Above: Pound-to-Euro rate shown at daily intervals with Fibonacci retracements of March fall, selected moving-averages.

Chancellor Rishi Sunak will deliver HM Treasury's latest spending review on Wednesday, which will be of even greater significance than usual given that Prime Minister Boris Johnson is expected to set out on Monday plans for an extension of the national 'lockdown' in all but name. 

"The Chancellor’s primary focus for now will remain on supporting the economy through the pandemic, although there are multi-year priority commitments in areas such as health, education and infrastructure (‘levelling up’)," says Hann-Ju Ho, a senior economist at Lloyds Commercial Banking. 

The government could be forced to rely on opposition votes to get plans for a tougher three-tier system through parliament, which would see even tighter restrictions meted out to parts of the country which are prolonged beyond the December 02 date at which the current 'lockdown' ends. 

Economists already expected GDP to fall by -6% month-on-month in November due to the current shutdown, although with the bill set to grow larger early this week there's a chance that appetite for Sterling could be dented early on. 

"There's only one set of prints the markets will be paying attention to next week: the flash PMIs. The flash readings will give us a first glimpse of how activity fared since the UK pushed through tighter restrictions (including a lockdown in England)," says Deutsche Bank's Raja. 

The tougher three-tier system will be outlined on Monday just hours after IHS Markit releases its latest PMI surveys of the manufacturing and services sector, which also risk causing an upset for Sterling.

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Consensus looks for the manufacturing PMI to remain above 50, which would imply that the industry continues to grow in November, while expectations for the services PMI are for a decline from 51.4 to only 43.2. Both PMIs fell sharply in the first lockdown, bottoming at 32.9 and 12.3 respectively in April. 

"There's been the emergence of a twospeed economy, with manufacturing benefiting from the global recovery, while services activity is hit by renewed restrictions," says Ho. "We forecast UK services PMI to fall below the 50 expansion/contraction level for the first time since June, dropping to 43.0. Eurozone services is expected to remain below 50 for a third month."

There is a danger that adverse economic news pulls Sterling back from the 1.12 handle early on in the week, delaying any move up to six-month highs.

Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank,  is looking for the EUR/GBP rate to decline to a level that would see the Pound-to-Euro rate testing its 200-week moving-average up at 1.1344, a six-month high for Sterling, although she's also warned the British currency could meet technical resistance along the way at 1.1280.

She and the Commerzbank team say the Pound-to-Euro rate would find support around 1.1031 in response to any weakness seen over the coming days.

"Vaccine hopes and rising infections could be a zero-sum game for market sentiment and we expect broad G10 FX stabilization. In the UK, the waiting game for a Brexit deal may continue for one more week," says Petr Krpata, chief EMEA strategist for currencies and bonds at ING. "With the progress being slow and the negotiations to extend into early December, this suggests limited catalysts for GBP gains next week. EUR/GBP should thus remain flat."

Above: Pound-to-Euro rate shown at daily intervals with EUR/GBP (black line, left axis).