5-Day Pound-to-Euro Exchange Rate Forecast: Bears Back in Charge?

Modified: Monday, 23 April 2018 12:46 BST

- GBP/EUR is trading with a downside bias as the new trading week begins

- The main data release for the Pound is Q1 GDP data

- For the Euro, the main event is the meeting of the European Central Bank's governing council

Pound Sterling is falling back into the middle of a long-term range against the Euro with 1 Pound buying 1.1407 Euros on the inter-bank market at the start of the new week.

The Pound-to-Euro exchange rate broke down quite sharply last week, falling for four consecutive days after comments from the head of the Bank of England (BOE) put the brakes on expectations for higher interest rates owing to a slew of softer-than-expected data releases of late, while news reports suggest the EU looks set to reject the UK's latest proposal for the Irish border in what looks like an attempt to corall the UK into a customs union agreement.

From a technical perspective, the pair is now back in the middle of the range it has been trading within for more than six months and the last peak does not appear to have comprised a successful breakout.

The question now is will the pair continue to fall down within the range or will it recover and make another retest of the highs?

The answer is that the momentum appears to be with the bears, which is to say to the downside, so we would expect to see the exchange rate move lower initially.

Yet right below the exchange rate there now sits a zone of fairly tough support comprised of the 50-day moving average (MA) at 1.1379 and the monthly pivot (PP) at 1.1348, which are both likely to present obstacles to further downside progression, and so the pair may pause here in the 1.13s for a while before breaking lower, if at all.

The 50-day MA could be particularly difficult to overcome: price action often stalls, rebounds or even reverses after touching large moving averages as more trading goes on around them because they are popular indicators amongst investors.

Assuming the exchange rate can pierce below these levels - which would be confirmed by a break below 1.1315, then we would expect a continuation lower to the next target at 1.1250 just above the 200-day moving average and the range lows.

Despite our short-term bearish stance, we eventually still see a bias towards more upside eventually, with a break above the 1.1600 range highs confirming a continuation up to a target at 1.1720, where the R2 monthly pivot is situated.

The pair was in an uptrend prior to the formation of the range and this usually means it will continue higher afterward.

The 'look and feel' of the chart also suggests an upside breakout rather than a downside break, which we would argue simply wouldn't look 'right', given the prior market's form.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

News and Data to Watch for the Pound

The main release for the Pound in the week ahead is the first release of GDP growth data for the first quarter of 2018, which is out at 9.30 GMT on Friday, April 27.

Expectations are for growth to slow slightly to 0.3% quarter-on-quarter (qoq) compared to 0.4% in Q4 and to remain unchanged at 1.4% compared to the year before (yoy).

This is no doubt, due to the bad weather in Q1, but given growing doubts about the UK's economy in general the market may be expecting a lower result, which would further lower the probability of the BOE raising interest rates in May.

From being 96% certain the BOE would hike interest rates two weeks ago, the market is now only 50% sure - a lower GDP reading would reduce that even further. Generally higher interest interest rates equal a stronger currency and vice-versa as higher rates attract inflows from foreign investors drawn by the promise of higher returns.

"1Q UK GDP (Fri) will be of extreme importance in the week ahead; we think an in line with expectations print of +0.3% QoQ - which is also ING's forecast - will be enough to trigger renewed sentiment over a May BoE rate hike," says Chris Turner, an analyst with ING Bank N.V. in London. "We think a decent GDP print reviving a 'buy the BoE rate hike rumour, sell the fact' price action in GBP markets."

"We are penciling in a slowing in the growth pace from +0.4% qoq in Q4 2017 to +0.2% in Q1. Furthermore, if anything, risks look to be to the downside of a +0.2% print," says Ryan Djajasaputra of Investec.

Although Djajasaputra puts it down almost entirely to bad weather rather than anything else, and thus a temporary negative. "We suspect that Q2 GDP will not look quite as soft, especially with the household cash squeeze slowly turning around," adds the analyst.

Apart from GDP data there are no other top-tier releases for the Pound in the coming week, but GfK Consumer Confidence is expected to continue showing a negative -7 reading in April when it is released on Friday at 00.01.

There are also three surveys from the Consortium of British Industry (CBI), the Business Optimism Index and the Industrial Trends Orders at 11.00 on Tuesday, followed by the Distributive Trades survey on Thursday at 11.00, which is forecast to show a rise to 5 from -8.

In addition, Public Sector Borrowing figures for March are out on Tuesday at 9.30.

News and Data to Watch for the Euro

For the Euro, the main event in the week ahead is probably the policy meeting of the European Central Bank (ECB) on Thursday 26 at 12.45 GMT.

ECB policy oils the wheels of financial liquidity for the region and is thus an important variable in establishing the value of the Euro.

The ECB has already reduced its quantitative easing programme substantially and does not plan to make any further changes until the second half of the year at the very earliest, so no major policy changes are expected at the meeting.

The devil will almost certainly be in the detail, therefore, and consist in the analysis of hints, amendments or omissions in the language of the official meeting statement.

"A key question is whether we get any further clues from the Governing Council on how it views the Q1 softening in economic data and whether it sees this as a slowing in growth momentum or a blip, and also how this might sway the policy stance going forward," says Investec's Ryan Djajasaputra.

The view is shared by analysts at Canadian investment bank TD securities:

"We look for patience & prudence from the ECB, with little new from the Governing Council aside from acknowledgment that recent activity data has softened a little," they say, adding, "but that it should not affect their medium-term forecast."

Nordea's Andreas Steno Larsen, meanwhile, thinks the ECB will probably sound a little more dovish on account of the recent run of poor economic data results for the region but refrain from "changing forward guidance".

"While Draghi's tone should be relatively dovish. We do not expect the ECB to change its forward guidance until the July meeting unless the next few inflation figures surprise to the upside," says Larsen.

A 'dovish' sounding ECB - i.e. the striking of cautious tone - would most like weigh on the Euro and give Sterling the opportunity to potentially appreciate, or at least form a base in respect to the recent declines.

The other main releases for the Euro are Manufacturing and Services PMIs for April, out on Monday at 9.00 - indeed these may even colour the ECB's rhetoric depending on their outcome.

PMI's are survey-based metrics which gauge sector activity.

Manufacturing PMI is forecast to remain unchanged in April at 56.6, whilst Services is expected to decline to 54.6 from 54.9 previously; the Composite is forecast to 54.9 from 55.2.

Given recent sharp falls in PMI's since the start of 2018, a further decline would not come as a surprise, and the unchanged Manufacturing figure almost looks marginally optimistic.

"There's a risk PMIs declined further in April," says Andreas Steno Larsen, analysts at Nordea bank, adding, "The currency remains strong, which coupled with continued uncertainty about a trade war could have weighed on sentiment in Manufacturing industry in April."

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.