5 Day Pound-to-Euro Rate Forecast: Slight Downside Bias, 1.1305 Eyed

Image © Savo Ilic, Adobe Stock

The GBP/EUR exchange rate is quoted at 1.1413 on the inter-bank market at the start of the new week, with Pound Sterling looking to hold onto the gains made ahead of the weekend courtesy of the better-than-forecast manufacturing numbers out of the UK; data which suggests the economy might just be recovering nicely following the dour start to 2017.

The improved sentiment is reflected in the charts which confirm Sterling is in fact starting the new month against the Euro from a position of strength; GBP/EUR was as low as 1.1309 at one point in May, and while price action has been anything but smooth the exchange rate has formed a series of 'higher-lows' which is indicative of a short-term uptrend.

From a long-term perspective the pair is rangebound with 1.11 forming a base and 1.15 a ceiling; looking at the price action within the range more closely, we see that the pair is, in fact, mirroring its broader sideways trend on a smaller time-scale between 1.13 and 1.15 (see chart below).

Therefore, calling direction in the coming week is tricky owing to the choppy nature of the exchange rate at the current juncture.

Based on the above, I would suggest there is a marginal bias to more downside evolving.

The smaller period of sideways movement within the range was preceded by a wave down from the range highs on April 17 and the most natural fit now would be for a similar wave to break lower, providing a sort of 'symmetry' which is often the case on financial price charts.

Of course the strong 'up day' on Friday might just complicate this view.

Nevertheless, when pressed I would suggest it looks more natural for the exchange rate to move down in its next directional impulse, we would set a target at 1.1305 where the 200-day moving average (MA) is situated.

Large moving averages tend to present tough obstacles to trending prices and prices often stall or even completely reverse at them. People often use them as levels to make important trading decisions which can lead to peaks and troughs in supply and demand. Short term traders also often try to take advantage of the high volatility adding to the chaos. Thus we see a chance of the down move ending at or near the 200-day.

The MACD momentum indicator in the lower panel is also signaling the potential for more downside as it looks more likely to fall than rising from its current position, and this provides some confirmation for our bearish forecast.

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Week Ahead: GBP

Monday, June 4: Construction PMI for May. The data released at 09:30 shows the construction sector continues to recover from its first-quarter slump in May.

May's construction PMI came in at 52.5, unchanged from the month of April, when economists had been looking for it to decline back to the 52 level.

This came as activity in the commercial construction segment reached a three-month high while the residential and civil engineering segments saw a moderation in activity.

However, and on the downside, new order books contracted for the fourth time in five months suggesting recent gains in the activity index may not be sustained for much longer.

Typically the construction PMI is ignored by markets, but owing to the slowdown we saw at the start of the year, and a focus on future Bank of England policy, foreign exchange markets will be paying more attention to this release than normal.

Tuesday, June 5: Services PMI for May, consensus forecast is for 53.1, up on April's 52.8.

The services sector accounts for over 80% of UK economic activity and it is therefore no wonder this is likely to form the highlight for Sterling in the coming week.

Thursday, June 7: We get a slew of house price data which is unlikely to hurt or help Sterling. Nevertheless, surprises will catch some attention. The RICS house price balance is forecast to deliver a reading of -1% and the Halifax house price index is forecast to show a reading of 1% on a month-on-month basis.

Friday, June 8: Industrial and manufacturing production numbers are on the docket. Consensus forecasts for industrial production for April is at 3.1% on an annualised basis, up from the previous month's 2.9%.

Consensus forecasts for manufacturing production are for -0.2% for April on an annualised basis, down on the previous month's -0.1%.

With sentiment towards Sterling rather dreary on the economic front we would suggest the risk-reward ratio lies to the upside, as positive surprises tend to deliver the greatest impact when consensus is poor. In short, bad economic news is largely in the price of Sterling.

Week Ahead: EUR

The Euro is outperforming the Dollar but more-or-less unchanged against the Pound.

We are told the market will watching rhetoric from central bankers this week. Although Fed rhetoric is absent due to the blackout period, ECB speakers will be heavily featured. Amongst others, watch for Draghi and Weidmann (both Tuesday) and Praet (Wednesday).

The key question is this - are they going to prime markets for an exit from quantitative easing, something that should be announced at the July meeting?

If yes, then expect the Euro to be bid, if no then we could see the single-currency come under pressure once more. Based on the inflation numbers out last week the ground for an exit from quantitative easing are in place, so we would say a steady-as-she-goes message from the ECB members will be likely.

The data calendar for the Eurozone is quite thin in the week ahead and we would therefore expect markets to be more interested in European politics, particularly the first moves by the newly-installed Italian government.

Tuesday, June 5: The composite PMI for May is released at 09:00 B.S.T. and should give a wholistic overview of Eurozone economic activity in May.

Consensus forecasts are eyeing a reading of 54.1, unchanged on the previous month.

The services PMI is released at the same time and markets will be looking for a reading of 53.9.

Thursday, June 7: GDP data for the first quarter is released, this is the second estimate so don't expect fireworks.

Seasonally adjusted GDP rose by 0.4% in both the Eurozone (EA19) and in the EU28 during the first quarter of 2018, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat.

An unchanged reading is expected.

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