Relief as GBP/EUR Exchange Rate Sees Downside Momentum Begin to Fade, ECB Event is Key Risk Today

The British Pound has been in an unanswered decline against the Euro since January 23 and our studies suggest the down-move is likely to extend a little further yet.

However, the pace of decline may moderate.

While Pound Sterling found some stability in the upgrading of UK growth forecasts for 2017 in the UK's 2017 buget delivered mid-week, we doubt that the event was a fundamental game-changer for the under-pressure currency.

Rather we will likely see a wait-and-see approach regarding Brexit ensure no massive sell orders are triggered while focus turns back to the Euro and the decision-makers at the European Central Bank who meet today.

Concerning the technical outlook, judging from the recent indecisive candlesticks (bars) on the daily chart, the downtrend on GBP/EUR looks like it is losing momentum.

This is a warning sign to that the pair could rebound or even completely reverse higher.

The waning strength in the downtrend means we are not overly keen on forecasting a continuation lower, however, given the short-term bear trend technically remains intact, it is still the default expectation that it will extend.

Confirmation of such a move would come from a substantial move lower, such as for example would occur if the pair moved below 1.1500.

There is not much support below there until you get to 1.1400, so that provides our initial downside target.

Looking ahead, the ECB rate meeting on Thursday 9 should be the main driver for the GBP to EUR exchange rate pair for the remainder of the week.

Analysts are almost unanimous in expecting that the ECB rate meeting on Tuesday will result in little change in policy, or even stance.

The Bank has already announced to reduce its monthly asset purchases from 80 billion to 60 billion euros starting from next month. The ECB will continue buying assets at least until the end of 2017.

Recent positive data and a rise in inflation have not changed expectations that the ECB will remain cautious which could well on the Euro.

"Watch the ECB meeting for changes in language, with a number of voices calling for a change to the ECB’s forward guidance. An updated set of staff projections, which are likely to see an upward revision to inflation estimates, will add weight to those calls. Our economists, however, think the ECB will stick to its guns, looking through the energy-driven rise in inflation,” says Sue Trinh, a foreign exchange analyst with Royal Bank of Canada in Hong Kong.

Whilst headline inflation has been on the rise, core inflation, which takes out volatile fuel and food components has been left behind, suggesting little increased demand for non-essentials.

A hawkish tilt would surprise markets more than a dovish one, says Nordea Bank’s Tuulio Kuivo.

Such a shift would also support the Euro higher in most pairs.

However, the threat of political drama on the horizon with the French and Dutch elections coming up is one reason to expect further caution from the ECB.

"At his press conference, President Mario Draghi could hint at improved growth dynamics and rising inflation in the Eurozone economy, yet will likely remain supportive of loose monetary conditions due to rising French, Dutch and German election risks," says Ipek Ozkardeskaya at London Capital Group.