British GBP/EUR Exchange Rate 5-Day Forecast: Correcting Within Upward Channel

Modified: Sunday, 26 March 2017 12:46 GMT

The UK's Pound Sterling's steady recovery against the Euro came to an abrupt end on Friday, March 24 when the exchange rate fell from a peak of 1.1687 back down to the 1.1540s.

From a technical perspective It’s still too early to say whether this is the start of a deeper sell-off as the charts are still broadly constructive.

The exchange rate remains within its ascending channel and so could very well continue higher.

Nevertheless, there is much resistance in the 1.17s, including both the 50 and 200-day moving averages, which are likely to cap progress higher.

More likely in the short-term is a breakout below the channel, which can be seen more clearly on the four-hour chart (see below).

Such a move would be confirmed by a piercing of the S1 monthly pivot and the lower channel-line, most probably at about the 1.1515 mark.

It could lead to a breakdown of roughly the same height as the channel, extrapolated lower, which places the initial target at 1.1440.

There is also a possibility a bearish flag pattern has formed on the daily chart - an indicator of further downside to come.

A break below the 1.1370 lows would activate the flag and lead to a price extension of roughly the length of the pole extrapolated lower again from the point of the breakdown, which could see prices fall to new lows in the region of 1.1000.

Events and Data to Watch for Pound Sterling this Week

Theresa May’s triggering of Article 50 is likely to be the main event in the coming week; and Wednesday 29 is a likely date.

“We expect GBP/USD to fall quickly when the announcement is made but it should recover swiftly when the inevitable happens and investors finally realise the negotiation process will be long and filled with delay,” says Kathy Lien, managing director at BK Asset Management.

Why Sterling would fall after the event is perplexing in our view - it is clearly well signposted and there is unlikely to be any new information on the outlook.

Any potential drivers for Sterling will come in the succession of events following the triggering of Article 50 - for instance, the Europeans laying out their proposed negotiating timetable. But event here we see little of substance to bother the Pound. It is only when negotiations get underway in earnest will Sterling move.

Analysts at Barclays meanwhile reckon that the triggering of Article 50 could potentially align with a longer-term recovery they expect Pound Sterling to undertake.

“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in GBP from historic undervaluation as ambiguity over Brexit recedes,” says Marvin Barth, a foreign exchange analyst with Barclays bank in London.

Expect the European Commission to slap a divorce bill on Britain in the early stages of this whole process.

The Commission wants the UK to pay for all its outstanding spending commitments until 2020, which amounts to a bill of 50-60 billion Euros. Needless to say the UK does not agree with the figure.

Why would it the UK pay for a club it is no longer part of? Yes, these spending committments have been made, but they were made under the assumption that the UK would benefit from single market it is helping maintain via spending committments.

The EU wants this issue dealt with ahead of trade negotiations which suggests they don't want the UK to use the bill as a negotiating chip. Understandably, the UK wants the bill and negotiations to run concurrently.

We expect the tug-of-war over these various issues to potentially inject volatility into Sterling markets, but don't see any fundamental shift in direction resulting.

It is the trade negotiations that will be of utmost importance and these will only likely be tackled towards the end of 2017.

On the data front, it is a quiet week.

GDP data is out at 08.30 GMT on Friday March 31 but it is just a third and final revision and therefore highly unlikely to surprise. Growth for the final quarter 2016 is forecast to remain at the 0.7% announced by the ONS previously.

Mortgage Approvals, also out on Friday are not forecast to move much and thus seem unlikely to have much impact on the market.

Data, Events to Watch for the Euro

Inflation data for March, released on Friday, March 31 at 9.00 GMT is the big release for the Euro in the next five days.

There has been much talk of the European Central Bank (ECB) winding down its stimulus efforts in the face of higher inflation and improving growth outlook for the region, however, inflation will be the main gauge watched by the ECB to determine their timing of such cuts.

A reduction of monetary stimulus would be positive for the Euro as it would result in higher interest rates which tend to attract more foreign capital.

Headline inflation is forecast to show a 1.8% rise in March year-on-year.

It is Core Inflation which will be more impactful, however, because it removes the short-term volatility from oil and food, and is, therefore, likely to provide a clearer picture of the Eurozone’s real underlying inflation from economic growth.

If Core Inflation rises by more than expected the Euro will probably appreciate because it will increase the chances of the ECB normalising monetary policy and increasing interest rates. Higher interest rates are generally beneficial for a currency as they attract more foreign investment seeking higher returns.

Analysts at TD Securities think that there is a chance Eurozone (headline) inflation will slowdown in March; commenting on German CPI data they said:

“We look for inflation to ease off in March after Feb’s strong 2.2% (year-on-year) print, as the contribution from oil prices declines due to both lower base effects and their outright decline in March, and the timing of Easter leads to a further dip.”

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