The GBP/EUR Pair Targeting 1.2260 at Start of New Week
Pound Sterling jumped higher last week on news of a snap general election being called in June.
The Pound enjoyed one of its best days in a decade on Tuesday April 18, rising 2.7% to climb to a six-month high as markets took the news as a sign that the government would be able to pursue a softer, more market-friendly version of Brexit.
"With large swathes of traders shorting sterling the ramp produced a classic short squeeze as bears were forced to liquidate positions and buy back Sterling," say ETX Capital in a communiqué ahead of the new week.
But is it likely to be able to keep up its momentum in the week ahead?
Firstly, by way of a disclaimer, there is the small matter of French elections - the first results will be coming overnight and this could move markets notably, particularly if Marine Le Pen does well.
But, setting politics aside we do favour Sterling going forward with the charts suggesting momentum should yield further advances.
The pair has just broken out of a large triangle pattern which it has been forming since October last year.
It is now likely to move higher based on the target generated after the breakout, which is normally either 100% or 61.8% of the height of the pattern at its widest point.
This gives an initial minimum expected upside target of 1.2268.
Just to be sure, however, we would first want to see a break above the current highs at 1.2029.
There are other signs that the pair may move higher too.
When the 50-day moving average crosses above the 200-day moving average it is often a good indicator of further upside on the horizon but even more so when the cross is ‘shallow’ as opposed to perpendicular, as it is in this case.
An even stronger buy signal would have been produced, however, if the 200-day had been moving higher at the same time as the 50-day when it crossed above it, as that would have produced a ‘Golden Cross’ signal – however- this it is not essential.
The momentum indicator in the lower pane is moving higher in a straight line, further supporting the bullish forecast.
Key Data in the Week Ahead
For the Pound: look out for GDP data on Friday (09.30 GMT) when the preliminary estimate for the first Quarter is released, and expected to show a slower 0.4% pace of growth compared to the previous period but an elevated 2.2% increase year-on-year (that is compared to Q1 in 2016).
We would suggest that with Sterling becoming a 'political currency' once more it could ignore data. So watch the headlines.
For the Euro: bar the results from the first round of the French election out tonight, the European Central Bank (ECB) policy meeting to set interest rates on Thursday (12.45 GMT) is the highlight of the week, even though commentators do not generally expect any changes to policy at such a sensitive time (so close to the French Election).
Kathy Lien at BK Asset Management suggests the ECB may be more upbeat in its assessment, prompting some sort of recovery in the Euro:
“Since the last monetary policy meeting we have seen widespread improvements in the labour market, consumer spending and economic activity.”
The latest Eurozone inflation data, meanwhile, will be released on Friday, April 28 at 10.00, and is forecast 1.8% year-on-year in April - that is compared to April 2016.
