Pound-to-Euro Week Ahead Technical Forecast
Technical studies suggest Pound Sterling is ultimately pointed higher against the Euro, but further sideways action is likely in the short-term.
The Pound-to-Euro exchange rate starts the new week more or less where it closed the previous week - at 1.12. It is interesting to note that there has been very little by way of reaction in the Euro to weekend news that Germany's SPD has formally backed the formation of a coalition government with Angela Merkel and the Italian elections have resulted in an hung parliament.
The key focus on Monday will be data from the UK's dominant services sector while later in the week the European Central Bank delivers their latest policy update.
Ultimately though, our technical studies - and those of other analysts - confirm the fate of GBP/EUR as lying to the upside, but patience is required.
"More recent consolidation could of course also be used as a base/platform from which to enable fresh GBP gains over coming weeks," says Lucy Lillicrap, an analyst with brokers AFEX, who appears to be leaning on the same conclusions.
From a purely technical perspective the GBP/EUR pair has moved down to the range lows at 1.1200 and although it looks precariously poised to weaken further we think further downside will be limited and do not envisage a scenario where GBP/EUR falls back down to the 1.0700 lows again.
Recent history confirms Sterling tends to find significant buying support close to current levels.
The pair has gone sideways for almost six months now, which is a long-time for a lack of direction, and there is a heightened possibility this sideways mode may be reaching an end relatively soon. "In the meantime further choppy range extension looks more feasible while focus remains elsewhere," adds Lillicrap.
A breakout from the range would be confirmed by a move above the 1.1507 January 25 range highs.
Such a move would initially be expected to reach the R2 monthly pivot at 1.1580.
The exchange rate often stalls, pulls-back or reverses at pivots, and they present traders with an opportunity to sell (in the case of an uptrend) in anticipation of such a pull-back, which adds to the supply at that level, further enhancing the bearish pressure.
R2 is, therefore, likely to present an obstacle to further upside, and although we expect it to be broken eventually, those seeking confirmation should wait for a move above 1.1600, which would probably then see an extension up to a final target at 1.1780, calculated by taking the height of the range and extrapolating it higher by the 'golden ratio'.
The 'golden ratio' is an ancient mathematical constant which explains proportions in natural phenomena and applies handily to the technical structure of markets.
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Data and Events to Watch for the Pound
The Pound was largely unmoved at the end of last week as Prime Minister May delivered her 'road to Brexit' speech which offered little fresh information to investor.
The response from Europe has been mixed and there remains a question mark over whether the EU will sanction a transitional deal at its summit on March 23. A failure would to sanction a transitional period would be negative for the Pound, but markets appear to be willing to keep Sterling and the Euro stuck in the alread mentioned tight range until they get a clear steer on how talks are progressing.
In the week ahead there are reports the Chancellor Philip Hammond will also be making Brexit speech, focusing on the subject to a bespoke deal for the UK's dominant services sector. The UK has a services sector trade surplus with Europe so this could be important for the Pound, however, whether Hammond's proposals are likely to be accepted by Brussels is a different matter.
Staying on the topic of the services sector, the data highlight of the week comes in the form of IHS Markit's services PMI for February which will give a steer as to how well the sector performed.
Markets are looking for a reading of 53.3, which would be a shade up on January's 53.0. A beat on this estimate could give Sterling a nudge higher. A miss, the opposite effect.
However with the Brexit being the key driver of Sterling at present we would expect a large deviation on expectations in the data to move the currency; particularly against the Euro.
"We look for the services PMI to slip from 53.0 to 52.5 in February (mkt 53.2). We know that retail sales had a rough start to the year, with their largest 2-month drop over Dec-Jan in a year, and with the cold weather in February we can probably expect another soft month for consumer spending, weighing on overall services sentiment," says a note from TD Securities ahead of the release.
Watch Friday's Trade Balance data for January, which is forecast to show the deficit narrowing to -12.2bn from -13.6bn previously, when it is released at 09.30 GMT.
Industrial Production is out at the same time and is forecast to show a 1.1% rise month-on-month in January.
Manufacturing Production, also out at 09.30 on Friday, is forecast to rise by 0.2% in January compared to the previous month.
Data and Events to Watch for the Euro
The Euro will probably spend the first half of the week processing the political news from Sunday after the Italian general election and the German SPD party's vote on whether to form a 'grand-coalition' with Angela Merkel's CDU party.
The risk from both is tilted in favour of positive outcomes for the Euro, for although Movimiento 5 star, the anti-EU party, is polling the largest share of the vote, it is still only polling about 27%, which is not enough for a majority government, and it has said it is not keen on forming coalitions. Even if it did want to partner up with another party, it is unlikely any of the other large parties would want to partner with five star - so actual power is probably out of reach.
"It seems virtually inevitable that Sunday’s Italian election will result in no single bloc (let alone party) achieving a majority. Markets’ favoured outturn would probably be a ‘Grand Coalition’ between the larger centrist forces, notably the center-left PD and center-right Forza Italia," says Investec Economics analyst Victoria Clarke.
In Germany, Clarke is - similarly - of the opinion that the SPD will probably vote to form a grand coalition with CDU, which would also be favourable for the Euro.
Thus overall there is a chance of an upside surge for the single currency on easing political risk at the beginning of the week.
The other main event of the week for the Euro is the European Central Bank (ECB) policy meeting on Thursday at 12.45 GMT.
No change in monetary policy is likely but analysts will be looking for tweaks in the language of the statement for signs that the ECB is moving closer to letting go of stimulus. Any signs that this is the case, are likely to be positive for the Euro since stimulus via quantitative easing and perpetually low-interest rates dampen demand for the currency from foreign investors.
"The key event will be Thursday’s ECB Governing Council (GC) meeting. No change in its stance is likely. But we suspect that a more robust economic outlook will put the GC under pressure to remove the easing bias on its QE policy i.e. no longer state that its stands ready to step up or extend the programme if necessary," says Clarke.
From a hard data perspective, Eurozone January retail sales data kicks off the week, on Monday, and is forecast to show a 0.3% rise compared to the -1.1% fall in December, when it is released at 10.00.
Other hard data is unlikely to be as important, as both the purchasing manager indices for February and the Q4 GDP release, are second estimates and therefore unlikely to diverge substantially from the initial flash releases.
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