Pound-to-Euro Exchange Rate: Tech Forecast, News and Data in the Week Ahead

Politics takes centre stage over the next five days, with key events including the evolving Brexit story and Catalan elections in the Eurozone. Charts continue to show a bias to the upside. 

The proposition that prices move in extended trends is the foundation on which technical forecasting is built, but there are also periods when prices don’t move obediently in a single direction and instead simply loiter around a certain level.

It is in such a range-bound consolidation that we currently find the exchange rate of the British Pound-to-Euro. Avid readers of our site might notice that this is more or less as we found the pair a week ago and so our conclusions, broadly, remain the same.

The Pound-to-Euro pair's extended sideways range, which began in late September, is illustrated in the chart below.

Readers will note that prices have moved quite consistently between the two turquoise lines defining the ceiling and floor of the range, corresponding to 1.1500 and 1.11/1.12 respectively, for almost 3 months.

Above: Chart showing Pound-to-Euro over three month period. Captures consolidating trend.

We still expect a break higher after the pair has finished consolidating, for three main reasons:

Firstly, the pair was in an uptrend - albeit short-term - before the consolidation began to form and so, according to technical lore, the current price trend will probably continue in that direction afterwards.

Secondly, upward pressure has been stronger at the ceiling of the range than it has at the floor. The ceiling has inched higher with each touch, leading to the 'false breakout' which went to 1.1510 at the last pass, while the bottom of the range has consistently risen with each pass. This suggests a bias to an upside breakout.

Thirdly, the look-and-feel of the chart persuades us that the pair will rise rather than break lower. If it were to break out lower then the chart would not look 'right' and for experienced analysts, this is a consideration.

Unfortunately for bulls - that is traders betting on the pair rising - the ceiling is defended by a tough line of resistance at 1.1515 in the form of the R1 monthly pivot.

Monthly pivots are levels on charts - calculated from the open, high, low and close of the previous month - which have a special significance and tend to attract increased buying and selling activity around their vicinity.

Prices are often repelled upon meeting with a pivot leading to a fall (in an uptrend), which is either temporary or a full-scale reversal. This is because there are more sellers at the level looking for a chance to capitalize on the anticipated pull-back.

This all means the Pound-to-Euro pair may have difficulty breaking above the pivot point.

We would like to see a significant clearance of the pivot for confirmation of a successful break higher, which would be confirmed by a rise above 1.1530, which would clear the way to our upside target of 1.1660 for the pair thereafter, which is itself just under the R2 monthly pivot at 1.1665.

Breakouts often produce a move equal to 61.8% of the previous range’s height which, in this case is between 3 and 4 cents, would support our view the pair will rise up to 1.1660.

Sometimes, however, a breakout can see ranges move the full distance of the previous range, extrapolated in the direction of the break.

Most ranges are composed of a minimum of five component waves and the range on GBP/EUR has now formed four waves, labelled a-d on the chart, and is arguably in the process of forming a 5th wave downward thus confirming that it is close to completion.

Data and Events for the Pound

Front and centre in the week ahead for the Pound will be Brexit politics, with the cabinet set to discuss goals for phase two of talks in a key meeting requiring ministers to define the “end state” relationship the UK will pursue with Europe

"With a cabinet reshuffle imminent some may sound more conciliatory," says Canadian investment bank TD Securities in its weekly outlook.

Wednesday the UK parliament will vote on a further amendment to the Brexit bill, which is expected to put a firm departure date into legislation.

However, analysts are sceptical the government will get enough votes to push this through as opposition to the idea is pretty strong.

Rebels may be emboldened by their successful defeat of the government last week which, having passed “Amendment 7”, requires parliament to be given a “meaningful vote” on whether to accept the final Brexit agreement struck with Brussels.

From an economic data perspective, the main events are current account and business investment data, due out on Friday at 9.30 GMT, both of which are indicators that are peculiarly sensitive to Brexit and can impact the Pound.

The current account measures the difference between money flowing into and out of the UK. It most recently showed a deficit of £-23.2 bn.

Economists forecast this figure to fall to £-21.3 bn for the third-quarter. If the actual number falls even further then it may lift the Pound as it will show the deficit is narrowing faster than expected.

Business investment is expected to rise 0.2% for the third quarter, the same as it did in the previous three months. A greater increase would be positive for Sterling as it would suggest businesses are not holding back new projects as much as has been feared. Brexit uncertainty has been a key influence on business investment of late.

Data and Events for the Euro

Given how important political factors have become for currencies of late, the Catalan regional elections on Thursday, December 21 will be a major event for the Euro.

The pro-unity Spain Ciudadanos party is expected to get the largest share of the votes, at around 25% if opinion polls are to be believed. Such an outcome could help the Euro 'pop' higher as it will reduce the political risk premium attached to the currency, albeit marginally.

In terms of economic data, wage growth numbers are due out at 10.00 GMT Tuesday, December 19, and could have an impact on the Euro because of their influence on inflation expectations and, therefore, interest rates.

Wages are forecast to have grown by 2.1% in the third-quarter from 2.0% in the previous period. A greater than expected rise would be supportive of the Euro.

Eurozone current account data, due Wednesday at 09:00 am, is forecast to show the currency bloc’s surplus falling to €33bn, from €42bn.

A greater-than-expected fall would weigh on the Euro as the current account reflects the difference between money flowing into and out of Europe so is, therefore, an indication of demand for the Euro.

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