Pound-Euro Week Ahead Forecast: Risking 1.1150 and Eyeing 1.14 as ECB FX Risk Looms Over Euro

- GBP in outperformance mode but may see near-term weakness.
- As Chinese Q4 and 2020 GDP sets scene at open of new week. 
- Ahead of Presidential inauguration, address & ECB risk for EUR.
- Charts tip GBP lower. Support at 1.1150, 1.1111, scope for 1.14. 

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• GBP/EUR: spot rate at time of writing: 1.1252
• Bank transfer rate (indicative guide): 1.0956-1.1035
• FX specialist providers (indicative guide): 1.1081-1.1171
• More information on FX specialist rates here 

The Pound-to-Euro exchange rate closed Friday with its first intraday decline for seven and may be susceptible to a further losses early in the new week, although it benefits from nearby technical support and fundamental tailwinds like an elevated trade-weighted Euro and faster coronavirus vaccinations in the UK.

Sterling ended the week with its worst loss to the Dollar since September and its first decline for seven trading days against the Euro, although the British currency was otherwise the outperformer of the week among majors.

"Hot on the heels of discussion of potential Fed tapering as soon as the end of the year, BoE Governor Bailey has dampened expectations for negative rates," says Kamal Sharma, an FX strategist at BofA Global Research. "In relative terms, UK rate differentials versus G10 peers (weighted basis) has also widened to its highest levels for the year and have even widened against the USD. For now, we believe this will prove supportive for GBP, mainly on the crosses as we head into the 4^th February QIR. Before then, two speeches from Governor Bailey (18^th/20^th January) will also be closely watched before the MPC goes into its eight day purdah ahead of the February meeting."

The Pound rose against all major currencies for the five days to Friday although a resurgent U.S. Dollar was in close pursuit, while Europe's single currency saw its worst week for months as stock markets and other risk assets handed back more than half of the gains notched up in the opening days of the New Year.

Above: Sterling Vs the majors over selected timeframes. Source: Netdania Markets.  Click for closer inspection.

Global markets dipped on Friday as investors worried about whether a proposed $1.9 trillion aid package for America would make it through Congress, although Sterling's losses may have been exacerbated by a UK government decision to close international borders in response to new coronavirus strains. 

"We find it laughable how quickly this new “fiscal-negative” has emerged, in light of the Blue Wave we were told would be positive for risk sentiment, but we have to respect the price action as always," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. "EURUSD’s re-loss of the 1.2130-40s is concerning this morning as the broader risk-off tone intensifies, and so we’d be wary of fading this weakness until the S&P shows some signs of seller failure."

Despite its resilience so far, Sterling could be susceptible to further softness at the opening of the new week if China's final quarter GDP numbers are received poorly by the market given that the Pound has among the highest beta sensitivities of the major currencies to the Chinese Yuan.

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Equally but on the opposite side of the same coin, better-than-expected figures could pick the Pound up off the floor and enable it to continue outperforming. Consensus favours a 6.2% annualised rebound for the final quarter when the data is released at 02:00 London time on Monday morning.

"GBP has been the best performing G10 currency this week, benefiting from the mix of (a) the market re-pricing the odds of the Bank of England moving into the negative rate territory after Governor Bailey's comments earlier in the week; (b) faster roll-out of vaccination in the UK vs other major economies (EZ, US). While the former is now in the price, the latter should continue to provide a marginal support," says Petr Krpata, chief EMEA strategist for interest rates and FX at ING. "Despite its recent outperformance, sterling does not show signs of short-term overvaluation (currently trading at the level of its short-term fair value). This limits its scope for a short-term pull back."

GBP/EUR will digest China's data while facing technical resistance at nearby 1.1280 and with the charts indicating a retracement to support at 1.1111 is likely. 

Above: Pound-to-Euro rate at daily intervals with Fibonacci retracements of 2020 fall & 200-day, 55-day (orange) averages.  

But the 1.1150 level may arrest the Pound's fall on the way down if the 1.3480-to-1.3500 range proves supportive of GBP/USD. This might be likely because beyond the very near term, both the EUR/USD rally and market's bearish Dollar view are increasingly hinged on Sterling's further outperformance.

"EUR/GBP remains under pressure and is sitting on key support at the .8865/61 June, September and November lows. These have so far held the downside," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, referring to EUR/GBP. "Below .8860 will imply another leg lower to the .8671 April low."

A Pound-to-Euro fall to 1.1150 would lift EUR/GBP more than 100 points to 0.8970 but leave it short of the 0.9000 that technical analysts at Commerzbank say it needs to overcome in order to take the wind out of Pound Sterling's sails. 

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Jones and the Commerzbank team say that in the absence of a break above 0.90 it could be just a matter of time before the Euro gives up the 0.8860 level, which would leave it at risk of a further fall toward 0.8671. 

Such a performance from EUR/GBP would see the Pound-to-Euro rate rising above 1.1280 to eventually trade around 1.1532 but before Sterling reaches those lofty heights, it might first be found stopping off around 1.1416.

This coincides almost with the 50% Fibonacci retracement of the March 2020 downtrend and is the GBP/EUR level that would prevail if Thursday's European Central Bank (ECB) risk event pushes EUR/USD back to 1.20 while the main Sterling exchange rate GBP/USD drives the Dollar back to 1.37.

Above: Pound-to-Euro rate at daily intervals with EUR/USD (orange) and EUR/CNH (blue).  

The Pound-to-Euro rate always closely reflects relative price action in GBP/USD and EUR/USD and the latter could be susceptible this week to any fresh complaint from the European Central Bank about recent strength in the Euro currency and Eurozone's trade-weighted exchange rate. These concerns are such that without further outperformance from the Pound, Chinese Yuan or both, the party in the Euro-to-Dollar exchange rate may be all but over. 

"We expect the ECB to remain dovish on Thursday. Italy’s PM Conte is likely to ask for a confidence vote in parliament (Monday and Tuesday), while eurozone PMIs will probably decline across the board (released on Friday)," says Thomas Strobel, an economist at UniCredit Bank. "A dovish ECB is likely to prevent core EGBs from following the US “reflation” story, with the 10Y UST-Bund spread expected to widen further in the short term. As we do not expect early elections to be called in Italy, a further widening in the 10Y BTP-Bund spread offers an attractive level at which to accumulate BTP exposure. The USD may still receive some short-term support from the rise in US long-term yields."  

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The Euro will be most sensitive this week to the impact of the ECB's latest monetary policy decision and press conference due at 12:45 and 13:30 which, coming right after President Elect Joe Biden's inauguration on Wednesday 20 January, will afford President Christine Lagarde an opportunity to address a EUR/USD rally to post-2018 highs of 1.2350 and an economic outlook blighted by fresh coronavirus restrictions and a sluggish vaccine rollout. 

Sterling meanwhile, in addition to the tailwind that is a stretched trade-weighted Euro, could continue to enjoy fundamental support coming from an accelerated vaccination programme which, according to The Telegraph, is set to ensure that all over-18's will have had an opportunity to be vaccinated by the end of June. This is after Prime Minister Boris Johnson said on January 08 that by 15 February some 15 million people will have been vaccinated.

When combined with the three million who've already tested positive, this will mean that more than a quarter of the population will either have been vaccinated or diagnosed with the coronavirus by March. This is a fundamental tailwind that could help support Sterling for months to come.

Above: Pound-to-Euro rate at w eekly intervals with EUR/USD (orange) and GBP/USD (blue).