Pound-to-Euro Exchange Rate 5-Day Forecast: Predictable Ranges, but this is a Big Week for both Currencies

- GBP/EUR carries on trading predictable levels

- Recent activity suggests a slight bullish bias - but traders beware!

- ECB tipped to signal end of quantitative easing. UK wage data could disappoint

The sideways nature of the Pound-to-Euro exchange rate market has, If anything, intensified after forming a range (a) within a larger range (b) shown in the below charts.

This might be frustrating for those watching the market and looking for either the Euro or Pound Sterling to deliver stronger purchasing power, but there is one consolidation: the market is predictable and this allows for some consolation for those who dislike volatility.

The Pound is fundamentally undervalued than the Euro thanks to a 'Brexit premium', suggesting any substantive breakout - when it eventually comes - will be higher.

Of course, this depends on how Brexit turns out, with a 'good' deal required to assuage bears.

Zooming in to the most recent price activity (chart below) and we note how the pair has formed a long hammer candlestick on Thursday, which is a bullish signal. This gained confirmation on Friday after the market reacted by going higher. This now suggests more upside will be on the cards as the hammer is a short-term bullish signal.

Yet we feel the extremely strong sideways tenor of the market is not conducive to forecasting in either direction and so we remain extremely tentative in our expectations of more upside resulting from the aforementioned set-up.

Ultimately we prefer to stand aside until the market starts trending again as this is the more prudent option given the extremely random nature of non-trending series in financial markets.

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The Pound this Week: Big Data Releases

It's a busy week on the data front for the Pound.

Monday, June 10

Manufacturing production numbers are out, and markets are looking for the month-on-month reading for April to read at 0.3%, taking the year-on-year number up to 2.9%.

Any disappointment might hurt Sterling as markets are looking for economic data to start reflecting a pick-up in activity into the second half of the year, which could ultimately lead to an interest rate rise at the Bank of England in August.

Should expectations for an interest rate rise is August increase over coming weeks, on the back of improving data, the Pound should ultimately find more support.

Tuesday, June 11

This is the big one for Sterling.

The ONS will release employment and wage data at 09:30 which will in turn be closely watched by policy-setters at the Bank of England.

Average earnings, bonus included, is forecast to read at 2.6%, a beat on this should help Sterling find a bid as higher inflation = higher inflation on the horizon = higher interest rates at the Bank of England.

For Sterling, a beat on this 2.6% figure must be delivered if it is to go higher.

"However, recent outturns of pay growth – as captured by the 3M/3M growth rate – suggest the underlying trend in pay growth has fallen back recently," warns a preview note of the event released by economists at UniCredit Bank.

Wednesday. June 12

Another big day for Sterling as actual inflation numbers are released and the same dynamics as described above apply.

Headline inflation is forecast to read at 2.5% on an annualised basis, up from 2.4% in the previous month.

Clearly inflation is heading in the wrong direction for the Bank of England which is targeting a 2.0% inflation rate, and should the number beat 2.5% expectations for an interest rate rise will surely be ushered forward.

Be careful to watch the core CPI number - this is arguably more important than the headline number as it accounts for organically generated price rises that reflect economic growth dynamics.

Core is forecast to read at 2.1% a hit or miss against this number will likely move Sterling.

Thursday, June 13

Retail sales numbers are out, and with markets focussing on data once more, Sterling could react to any surprises.

Expectations are for UK consumers to be finding their feet again following a tough start to the year.

Retail sales are forecast to read at 0.6%.

Euro this Week: ECB, ECB, ECB

It's all about the European Central Bank (ECB) for the Euro in the week ahead.

Thursday, June 14 should give guidance on when the Bank finally plans to exit their quantitative easing programme.

The Euro exchange rate complex caught a bid this week when ECB member Peter Praet gave a clear indication that the coming meeting was "live" i.e. a big message would be delivered.

So, will the event keep the Euro rising? Not necessarily says Andreas Steno Larsen, an analyst with Nordea Markets:

"The market could easily get further carried away on this story ahead of the ECB meeting next week. Especially since the market usually tends to overreact I) when it “smells blood” on the story that the next step in the tapering process is closing in and II) high headline inflation (due to oil effects) almost always leads to exaggerated market assessments of the implications for monetary policy."

Nordea Markets prefer a “buy the rumour, sell the fact” approach ahead of the ECB meeting and find it difficult to see a scenario where the ECB ultimately surprises hawkishly compared to the expectations that will be built up over the next week.

So, while the message should ultimately be a pro-Euro one, on the day the market could well dump the currency.

What is assured, is we should expect volatility.

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