5-Day Pound-to-Euro Exchange Rate Forecast
© kasto, Adobe Stock
The GBP/EUR exchange rate is seen bouncing off the foor of a long-term range at the start of the new trading week.
Pound Sterling continues to trade in a broad sideways range against the Euro, like a ball trapped in a narrow tunnel, between the 1.1100 lows and the 1.1500 highs, as it has done for the last six months.
More recently it declined to the 1.1150 lows and then bounced last week after the Euro sold off following the European Central Bank rate meeting on Thursday. Since then it has recovered somewhat, rising back up to close the week at 1.1250 having posted a 0.35% gain on Friday, March 9.
On the four-hour chart (below), we see the first glowing embers of a new short-term uptrend after the beginning of a step progression higher, and this will probably lead to a continuation up towards the range highs.
Initially, it has to get over some short-term obstacles, however, and the next immediate focus for traders is 1.1300 where the 50-day moving average (MA) is situated, (at 1.1305), and above that is the monthly pivot at 1.1322.
A break above Friday's 1.1266 peak would provide confirmation of more upside towards this initial target at 1.1300.
Following that, the pair will probably rise all the way up to the range highs at 1.1500, however, a break above 1.1350 would probably be required for more confidence.
Following that, a breakout from the upside of the range is the most likely scenario, we think.
Ranges normally break in the direction of the trend prior to the formation of the range, which in this case was up, in the form of a rally from off the August 2017 lows.
Also, a breakdown simply doesn't look likely given the structure of the market.
If the exchange rate moves above the 1.1507, January 25, range highs, that would confirm further upside to the next target at 1.1580 where the R1 monthly pivot is situated.
R1 will likely offer resistance - pivots are levels where short-term technical traders tend to enter the market and trade counter to the dominant trend - and the market may temporarily stall of pull-back at the level, however, eventually we expect a continuation higher up to the next target at 1.1780.
The 1.1780 target is calculated by the common technical method of extrapolating the height of the range higher by 0.618, the 'golden ratio', a mathematical constant which explains proportions in the natural world and financial markets.
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Data and Events to Watch for the Pound
The main event for the Pound in the week ahead is probably the Chancellors’ Spring Statement, this is a new initiative brought in by Philip Hammond to provide an update on the economic and fiscal outlook.
No changes to the budget are expected and the statement is only scheduled to last 15-20mins, according to media reports, which is only a rump compared to the Autumn statement.
Budget's do not often move currencies so the Pound may not react, however, alongside the statement are revised forecasts from the Office of Budgetary Responsibility (OBR) which if substantially altered may impact on growth prospects and therefore Sterling.
The OBR has, on balance, been overly pessimistic in the past, generally undershooting with its forecasts and leading some commentators to expect it to revise up its forecasts on Tuesday.
"It is always difficult to predict other institutions’ forecasts. However in terms of the Spring Statement, we would expect the GDP growth projections to be a little more upbeat," says Ryan Djajasaputra, analyst at Investec.
The OBR's most recent forecasts are contained in the table below.
For the sake of context, Investec's own house forecasts is for GDP growth of 1.7% in each year.
The other main event is the Bank of England's (BOE) Financial Policy Committee (FPC) meeting on Monday (statement published Friday 16) to discuss possible changes to capital buffers, introduced after the financial crisis under the Basel 3 regulatory framework.
The focus will be on whether the BOE reviews the size of the "Counter Cyclical Capital Buffer" (CCYB), a piece of regulation which guards against excessive bank-lending during upturns and excessive parsimony during downturns - thus the "counter-cyclical" sobriquet.
In November it was raised to 1%, with the FPC also indicating that it could be increased further in H1 2018 - so there is a possibility of a change at the meeting.
Again, this is unlikely to hit FX markets in any major way, and even if it does the impact may be difficult to gauge beforehand.
The CCYB impacts on the supply of credit, and therefore on inflation and growth, which in turn influence currency value, and it will probably form a part of the bigger picture that currency analysts consider in relation to their forecasts.
Generally increases in the supply of credit are seen as inflationary and likely to increase interest rates, which in turn leads to capital accumulation and a stronger currency.
Data and Events to Watch for the Euro
The Euro outlined a volatile rip curl following last week's ECB meeting with initial optimism caused by a change in the language of the ECB's official statement soon evaporating after Draghi inferred there would be no haste to exit stimulus in his press conference after.
On Wednesday, March 14 ECB President Mario Draghi is scheduled to speak at 08:00 GMT, if he touches on issues of future monetary policy changes we could see the Euro move. Draghi is to address "The ECB and Its Watchers XIX" conference organised by the Institute for Monetary and Financial Stability in Frankfurt am Main, Germany. We could well get a further insights into the ECB's thinking, so watch the newswires around this time.
Elswhere, keep an eye on the European finance ministers (Eurogroup) on Monday, Tuesday and Wednesday, and news from initial coalition talks in Italy, where the outcome remains decidedly opaque.
"With no one party or indeed coalition winning enough seats for a majority, both the 5* (largest single party) and center-right (largest coalition) are vying for the opportunity to form a government," says Ryan Djajasaputra, analyst at Investec.
Yet with the "seat mathematics" not adding up it could be difficult for either side to form a functioning government.
The fate of the Euro rests on whether the government includes the anti-EU 5 Star party or not. If it does the single currency will be pressured lower on Italexit fears; if not it will rally as the final impediment to a more politically unified outlook will have been removed.
On the hard data front, the main release is probably February inflation data on Friday, March 16, at 10.00 GMT, however, this is the second estimate and therefore unlikely to vary much from the previous flash estimate.
The ZEW sentiment survey is also quite important as a fairly reliable forward indicator of growth which can impact on the Euro and is released at 10.00 on Tuesday morning. In the previous month, it came out at 29.3.
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