Pound Sterling vs. Euro Rate Forecast For the Week Ahead: Clash at 1.1450-1.15 Key to Outlook

- GBP/EUR to start week at upper end of its range 

- Industrial and manufacturing data in focus for Sterling

- For the Euro, the emphasis may be on the European Central Bank (ECB) policy views

© SlayStorm, Adobe Stock

Pound Sterling is seen locked in a ferocious battle against the Euro at the start of the new week with combat centred around the strong resistance area that lies between 1.1450 and 1.15. At the time of writing we are quoting 1.1470.

Sterling went higher at the end of last week despite the string of poor data releases, with the explanation being Sterling is currently subject to "seasonal flows" - the Pound tends to do well in April as the UK enjoys the benefit of repatriated earnings on the foreign holdings of UK investors.

However, there appears to be a steady supply of Sterling in the 1.1450-1.15 region that is clearly proving a tough nut for the exchange rate to crack above.

From a technical perspective, it means the Pound-to-Euro rate remains close to the ceiling of a sideways range it has been bouncing up and down within - like a rubber ball down a corridor - for over six months now.

Will it break higher, is the question on many trader's lips as we enter the new trading week? To which our answer is, "probably yes" with the proviso, "eventually," i.e maybe not right now.

Longer-term we remain bullish the pair as has been our stance for several months now.

One reason for our bullish stance is that the pair was in an uptrend prior to the formation of the range and this usually means it will continue higher afterward.

Another reason is that the 'look and feel' - for want of a better expression - of the price action more strongly recommends an upside break rather than a downside break; we would argue a break lower simply wouldn't look 'right' given the prior market's form.

For confirmation of a break higher, however, we would set certain conditions. For example, we would want to see a move above 1.1600, but if that were to transpire, we would expect a strong continuation up to a target at 1.1720, where the R2 monthly pivot is situated and likely to provide resistance to further upside.

Pivots are price levels used by professional traders to gauge the trend and as entry points for buy and sell orders; they, therefore, are likely to have an influence on future market direction.

When a rising currency pair touches a pivot it often pulls-back, almost always stalls, except in very fast-moving markets, and sometimes even reverse's trend completely.

In the meantime, however, most analysts are predictably cautious and expect further range-bound behaviour to dominate.

Given we are currently at the top of the range this would suggest the next move in the immediate future will be back down towards the 1.11-12 range lows.

In discussing how to trade the pair, Christopher Lewis, of Investing.com says:

"I think that going back and forth with a range bound system will probably be the best way to go about it," adding:

"This is a “rinse and repeat” type of situation, at least until we get some type of either breakdown or break out."

Returning to Danske's Mogensen, he too seems to think that more sideways action is likely.

"We still look for EUR/GBP to trade within the 0.8700-0.8850 range near term", says the analyst with reference to GBP/EUR's inverted twin EUR/GBP, the perspective preferred by the European market.

Data and Events to Watch for the Pound

The consensus now appears that recent poor business survey data was as a result of the weather - the 'Beast from the East' - rather than a real economic slowdown.

This means the Pound is probably on course for more gains as the Bank of England (BOE) are still likely to raise interest rates in May as most expect.

Higher interest rates are the fuel which drives currency trends as international capital-flows now dictate currency values, and they tend to move to places where interest rates are higher, all other things being equal, as that's where they will earn the most return.

Yet notwithstanding the weather, some doubt has now crept into whether the BOE will still pull the trigger in May.

In the coming week, there will be a heavy focus on wage inflation since if that rises the BOE is more likely to want to cool the economy with higher interest rates. In this respect, the IHS Markit REC recruitment industry survey, out at 23.00 GMT on Tuesday, April 9, may be instructive, as it includes the latest pay information from recruiters, according to Chirs Williamson, Chief Economist at IHS Markit.

"With the Bank of England having laid the ground for a May rate hike, the focus will, therefore, fall heavily on pay trends. In that respect, the REC recruitment industry survey will give an update on new starter and temp/contract staff pay rates, both of which tend to move in advance of pay growth in the wider economy," he says.

Another major release in the week ahead is Industrial and Manufacturing Production data for March at 9.30 on Tuesday, and the Trade Balance at the same time, which is forecast to narrow to -11.9bn in February from -12.3bn in the previous month - a narrower trade balance is sometimes positive for currencies, although the correlation of late seems to be waning.

Another major release is the Halifax house price index at 8.30 on Monday morning, with analysts carefully watching the result given the sector's lacklustre figures of late, and the especially poor Construction PMI result for March, which collapsed into contraction territory.

House prices ought not to be affected by the bad weather as much as construction 'activity' so this may be an important release for restoring some confidence in the sector.

If Halifax house prices show a deeper than expected fall, however, it may hit Sterling as it will almost certainly reduce the probability of the BOE hiking rates in May.

Current forecasts are for only a 0.1% rise in March versus the 0.4% increase in February, or 2.1% compared to a year ago vs 1.8% in February.

Finally, a heads up for Retails Sales in March comes in the form of the CBI Retail Sales monitor, out at 12.01 on Tuesday.

Data and Events to Watch for the Euro

It looks to be rather a quiet week for the Euro, with the main release probably in the guise of the European Central Bank's (ECB) March meeting minutes out at 12.30 GMT on Thursday, April 12.

Like the BOE the ECB set interest rates and are thus instrumental in guiding the exchange rate. In the case of the ECB its all about when they think the 'patient' is ready to be taken off the drip of monetary stimulus: the ECB is one of the few central banks to still operate a QE programme, around which the big debate is when it will end the programme and start raising interest rates.

We see little chance of the minutes impacting substantially on the outlook for the Euro, however, as the landscape has changed a lot since the meeting at the start of March, and officials may already be less optimistic due to a trend for releases to show a slowdown. Thus even an upbeat minutes may be interpreted as of historic interest only.

Of perhaps more import may be fresh communication from ECB members in the week ahead, including vice-president of the council Vitor Constancio at 14.00 on Monday, ECB's Praet at 17.45, president Draghi himself on Wednesday at 12.00 and Bundesbank's Wiedmann on Thursday at 17.00 - and what may be interesting will be to see if hawks like Wiedmann are moderating their stance at all (unlikely) in light of the poor run of data.

Other data from the Euro-area includes the Trade Balance for February, out at 10.00 on Friday, April 14.

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