The Pound-to-Euro: Technical Forecasts, News, and the Week Ahead

Pound-to-Euro is forecast to rise in the week ahead as it emerges from a long sideways trend and the EU Council meets to decide if "sufficient progress" has been made in Brexit talks.

The Pound-to-Euro made new 6-month highs last week on news of a breakthrough in the Brexit negotiations.

The exchange rate broke above 1.1500 and reached a peak of 1.1510 - our initial target from last week's forecasts. It is probably no coincidence that 1.1510 is also the level of the monthly pivot, which is a chart level that traders often use to assess how extended the market is.

Monthly pivots - there are several - are also levels of support and resistance in themselves. This means that when currencies touch them they are often repelled, as happened in the preceding week when GBP/EUR touched 1.1510 and then fell back. 

This often happens because many traders simultaneously come to expect a pull-back at the pivot, which they often trade as a very short-term directional bet, that then increases supply of the currency at the level of the pivot. This further encourages the price to fall, essentially making the pull-back a 'self-fulfilling prophecy'.

From a bigger picture perspective, however, we still forecast the exchange rate to eventually breakout above the top of its range and follow-through higher, to a target of 1.1650.

Technical lore has it that sideways markets, like the one GBP/EUR has been in for the last few months, usually end up breaking out in the same direction as the move prior to their formation, which in this case, was up.

Another reason we expect a breakout higher is that this just looks more likely rather than a move lower, based on the chart's look and feel, the harmony of lines and 'rightness'.

We, therefore, see a break above the highs and pivot at 1.1510. A move above 1.1515 confirms a continuation higher, to our target at 1.1650, which itself is just below the R1 monthly pivot at 1.1665.

Data and Events for the Pound

Despite a packed calendar, the most important event in the week ahead is likely to be the EU summit in Brussels on Thursday and Friday - where the "sufficient progress" milestone for Brexit negotiations will be discussed.

Friday is highlighted as when the EU 27 will announce whether negotiations can move onto phase 2, which includes a discussion of a interim 2-year transition phase, as well as the framework of a final bespoke trade agreement.

Mikael Olai Milhøj, an analyst at Danske Bank, says the summit will merely formalise what has already been tacitly agreed between May and EU leaders in the previous week, with little impact on Sterling. 

"It is too early for markets to reprice the Brexit risk premium significantly – we think this is more a theme for six to 12 months forward, when we expect to get more clarification on phase 2. We expect transition talks to begin in Q1," Milhøj writes in a recent note. 

The Pound surprised many observers when it fell following news of a "deal" Friday. Kathy Lien, a managing director at BK Asset Management, puts the move down to investors seeing a "long and rocky" road ahead for negotiations. 

Another major event in the week ahead is the Bank of England (BOE) interest rate announcement on Thursday, December 14 at 12.00 GMT. The Bank is widely expected to keep its interest rate unchanged at 0.50% after raising it for the first time in a decade back in November. 

"We do not think the BoE will change its signal at this meeting, as data have been in line with expectations," says Danske's Milhøj.

On the economic data front, the main release is November's inflation report, which is out at 9.30 on Tuesday. Expectations are for CPI to have held steady at 3.0% during the recent month. 

A higher inflation print will lead to a rise in the Pound because it could increase the chances of the BOE raising interest rates again, and higher interest rates attract greater inflows of foreign capital due to the draw of better returns.

Another key event is Wednesday's average earnings report covering the three months to the end of October, which is important because wages can have a major influence on inflation.

Finally, retail sales are out at 9.30 on Thursday, December 14, and are forecast to show a 0.3% rise when compared with the previous month. A better-than-expected number would support Sterling as it would have positive implications for GDP growth.

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Data and Events for the Euro

The main event for the Euro in the week ahead is the interest rate announcement from the European Central Bank (ECB). No change in policy is expected, however, markets will watch closely for changes to the central bank's growth and inflation forecasts.

Olai Milhøj at Danske Bank says the ECB will revise up its forecasts for third and fourth quarter growth due to a recent run of positive data. He also predicts and upward revision to the ECB's forecast for inflation in 2018, due to the recent rise in oil prices.

Upward revisions would support the Euro as they could increase the chances of the ECB winding down its stimulus programme sooner rather than later.

"Despite improvements in the labor market, manufacturing, and service sector activity, we don't expect the central bank to change their views and a reminder of their dovish stance could extend the slide in EUR/USD below 1.17, or have little impact on the currency," says BK Asset Management's Lien.

On the data front, purchasing managers indices for the Eurozone's manufacturing and services industries are scheduled for release, at 9.00 on Thursday, December 14.

These come ahead of the ZEW Sentiment Survey, which is considered a reliable forward indicator for the German and Eurozone economies and is out at 10.00 on Tuesday, December 12.

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