The Pound-to-Euro Rate's Week Ahead Forecast

Inflation data forms the main data event in the coming week for Pound Sterling while the charts confirm the GBP/EUR exchange rate remains locked in a sideways range.

Sterling starts the new week on the backfoot against the Euro which continues to outperform its main competitors amidst ongoing positive sentiment towards the Eurozone and the easing of political risks now that German leaders have taken concrete steps to forming a coalition government.

At the time of writing 1 GBP buys 1.1245 EUR on the inter-bank market with retail rates starting at 1.1138.

Our technical outlook for the Pound-to-Euro exchange rate sees a bias to further upside in the longer-term, but patience must be exercised as near-term we are likely to remain within recent ranges. 

GBP/EUR is currently still oscillating in a range between 1.1100 and 1.1500.

Normally trading ranges are composed of a minimum of five waves which means this range may be close to finishing as it is currently in the fifth wave or component wave 'e' (see chart below).

Wave 'e' is descending to the range lows situated at around 1.1150-75.

We don't know whether it will reach the range floor but it may do as it is still in a short-term downtrend.

Once 'e' is complete we expect the exchange rate to move back up towards the highs at 1.1500 and breakout of the range to the upside.

The reason we expect a breakout higher rather than lower is twofold.

First, the short-term trend immediately prior to the formation of the range was up and this marginally advantages an upside breakout.

Second, a breakout higher looks like a more natural evolution purely from a visual perspective, whereas a breakdown would just not look 'right' somehow.

A move above the wave 'd', December 8, highs at 1.1510 would confirm a breakout to the upside, to an initial target at 1.1600, just below the R2 monthly pivot.

Monthly pivots tend to exert downward pressure on rising prices due to traders targeting them as levels to short-sell.

A clear break above R2, confirmed by a move above 1.1630, however, would signal a continuation up to a final target at 1.1730, calculated by taking the percentage (61.8%) equivalent to the 'golden mean' of the height of the range and extrapolating it higher - a tried and tested method for establishing a minimum target after a breakout.

The 'golden mean' is an ancient mathematical ratio governing many proportions in nature and reputedly financial markets too.

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Data and Events for the Pound

The key data release for the Pound is inflation data out at 09.30 on Tuesday, January 16, which is forecast to ease to 3.0% compared to the same time in the previous year, from 3.1% in November.

Core inflation is likewise forecast to ease to 2.6% from 2.7% previously.

A higher-than-forecast print will probably strengthen the Pound as it will increase pressure on the MPC to increase interest rates in order to try and limit future inflation levels.

Higher interest rates are positive for currencies because they draw greater inflows of foreign capital with the promise of higher returns.

"We have a below consensus forecast for the UK CPI print due on Tuesday, which could also weigh on GBP temporarily," says Jens Nærvig Pedersen, a senior analyst with Danske Bank.

Danske Bank estimate CPI headline fell to 2.9% in December, from 3.1% in November, due mainly to a lower contribution from food prices. We estimate core inflation fell from 2.7% to 2.6% due to a decrease in service price inflation.

Analysts at TD Securities are marginally more hawkish, expecting inflation to remain at 3.1%.

"Our 3.1% forecast for headline CPI is just above the top of the BoE's target range and well above the BoE's forecast of 2.7% from the Nov Inflation Report. Core CPI should soften by a tenth, but the big jump in energy prices into the end of the year will keep the headline well-supported," say TD Securities in a note to clients ahead of the new week.

Friday sees the release of retail sales data which often moves Sterling as it gives an insight into the health of the UK consumer.

The UK economy is heavily reliant on the retail sector and should data beat expectations we would expect some positive response in Sterling.

The bar is actually set quite low for a positive surprise as monthly retail sales for December is forecast to show a decline of 0.6%, a slowing from then previous month's growth of 1.1%.

Monday sees the Bank of England in focus with a speech from Silvana Tenreyo (above), the new member of the Bank's Monetary Policy Committee (MPC), at 18.15 GMT on Monday, January 15.

Not long after she first joined the BOE back in October 2017 Tenreyro said she would want to see UK employment improve and wages rise further before advocating raising interest rates - a move which would be bullish for the Pound.

"Silvana Tenreyro, an external MPC member, said she would need to see more evidence of the elimination of slack in the labour market before voting for a rate rise," says Chris Giles, Economics Editor at the Financial Times.

Yet the unemployment rate has not fallen since she said those comments and instead has stayed the same at 4.3% since September 2017, so assuming this is still her view, we do not expect her to talk up interest rates on Monday, which is on margin negative for Sterling.

UK Unemployement has stayed at 4.3% (Image Courtesy of tradingeconomics.com)

Data and Events for the Euro

The Euro rose strongly in the previous week following the release of the minutes of the European Central Bank's (ECB) December rate meeting which showed a greater willingness from members to switch off the printing presses and eventually raise interest rates.

In the week ahead there is a lack of major drivers on the data front to keep the rally going, although commentary from ECB's Coeure on Thursday at 14.30 GMT has the potential to contribute a more up-to-date view on the debate sparked by the minutes.

Although December inflation data (CPI) is out on Wednesday, January 17, at 10.00, it is only the final estimate and, is, therefore, not expected to vary from the flash estimate of 1.4%, or have much of a market impact.

Of course, if it is higher, then the Euro could well continue rising as it will indicate inflation forces are even stronger than previously thought, which increases the chance of the ECB normalising policy sooner.

Other major data releases include the trade balance on Monday, January 15 at 10.00, which is forecast to show a rise in the surplus to 28.2bn from 18.9bn in November.

A higher trade surplus reflects a net rise in exports which is generally positive for a currency as foreign buyers have to exchange into Euros to pay for the exports, so it indicates greater demand for Euros.

Friday also sees the Eurozone current account (CA) balance in November, which is expected to continue showing a surplus too since the balance of trade is a major component of the CA. 

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