British Pound vs. Euro Week Ahead Forecast: Perched Precariously Ahead of Super Thursday

Image © European Central Bank

- Pound-to-Euro exchange rate sitting at bottom of long-term range with risk of breakdown

- Break of 1.1164 lows would confirm more downside

- Bank of England meeting main event for Pound; Inflation data main release for the Euro

Pound Sterling starts the new week softer against the Euro with 1 GBP buying 1.1221 EUR, 0.20% less than at the previous week's close.

Our technical studies confirm GBP/EUR to be perched rather precariously at the bottom of a long-term range and there is a definite vulnerability to price-action.

Overall the pair appears to be at a pivotal point in its development, with the next move probably dictating the trajectory of the next phase of movement - whether higher or lower.

It is probably no coincidence that the week-ahead also plays host to the August Bank of England (BOE) policy meeting at which the expectations is for a rate hike of 0.25%. Since a rate rise would be positive for the Pound it could well provide the catalyst for a recovery. Likewise the disappointment of a 'no-hike' could be the catalyst to the pair breaking lower.  

GBP/EUR has already pierced the bottom of its long-term, sideways, range and is therefore more likely to go lower from a technical perspective, especially if the range floor is pictured as the lower border of a channel in the way shown in the chart below - which is a very plausibly interpretation.

Last week's rather strong recovery from the 1.1164 lows back up to the 1.1279 highs, however, remains difficult to define and could be one of two things: either a'throwback', before a continuation lower, or the start of a stronger recovery back into the range.

The fact the rate ended the week at just below the lower channel line, fits with it being a throwback before a resumption lower, but for confirmation of a bearish extension we would first want to see a break below the 1.1146 lows, before a move down to the next major target at 1.1025.

Alternatively, a look at the 4hr bar chart suggests its possible to argue the pair may be in a recovery move higher, since it has already formed at least two higher highs and higher lows which some analysts take as the base-line requirement for a change of short-term trend. In fact, it is even possible to argue it has formed five higher highs and four higher lows.

At the same time the complex consolidation at the highs (bordered in the red) gives pause for thought, as it strongly suggests a bearish fulcrum-like pattern (used in point & figure charting analysis but applied here), which suggests more downside, as does the sharp bearish momentum and drop in price in the last price bar of the chart, right before the close on Friday.

As such, rival interpretations muddy the view but overall, we are marginally bearish, on balance, especially in the very short-term as the pair looks likely to continue its 4hr chart decline back down towards the 1.1146 lows again - whether it will break below them, however, and give the green light for more downside - we don't know and can't tell; and probably won't know until after the BOE rate meeting on Thursday when Sterling's fate will probably be 'sealed'.

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Key Events to Watch For Sterling this Week

The main event for Sterling on the economic calendar in the week ahead, is the Bank of England policy meeting on Thursday at 11.00 GMT, followed by governor Carney's press conference at 11.30.

The BOE's quarterly inflation report will also be released at the same time.

The current consensus expectation is for the Bank to announce a rise of 0.25% in the base interest rate in the UK to 0.75%.

A hike will probably result in only limited upside for the Pound as the move is already widely telegraphed and lacks the 'element of surprise' for an explosive thrust higher.

The probability of a hike has been hovering at around circa 80%, supported most recently by last week's positive data releases.

Therefore, what will matter is whether the Bank hints at further interest rate rises in coming months. If the Bank strikes a hawkish tone on the matter then Sterling might well extend higher. If the market gets the sense that this is a 'dovish hike' i.e. one that is unlikely to be followed by another rate rise in coming months then the currency might fall.

"We fear that sterling, which has not benefited so far from prospects of tighter monetary policy at home, may suffer," says Roberto Mialich, FX Strategist at UniCredit Bank in Milan who adds Sterling is damned if the BoE hikes, damned if it does not."

"If the BoE hikes, as we also expect, we would see this as a policy mistake hurting the economy, and thus the currency, over the medium term. If the bank leaves the rate unchanged, investors’ disappointment will likely lead to new GBP sales," says Mialich.

The one spoiler to a rate hike are Brexit risks.

EU chief negotiator Barnier's recent criticisms of key aspects of the Chequer's plan, such as goods' tracking and variable tariffing, make it possible the BOE could opt for caution and not raise rates at all.

"On data grounds a rate rise would seem justified after the weakness in Q1 proved to be temporary, however the uncertainty seen at the end of July might stay the banks hand," says Michael Hewson, analyst at CMC Markets.

Given the heightened expectations of a hike the shock of a no-change is a major risk for Sterling in the week ahead.

The other main data releases for the Pound are Purchasing Manager Survey Indices (PMIs).

The first PMI to be released is manufacturing out on Wednesday at 9.30 B.S.T, which is forecast to show a slide to 54.2 in July from 54.4 in June, although any result above 50 is indicative of growth.

Construction PMI is out on Thursday at the same time and forecast to show a fall to 52.9 from 53.1.

Services PMI is out on Friday at the same time and is expected to show a fall to 54.7 from 55.1.

PMI's are calculated using the answers from surveys of industry purchasing managers who have a pivotal view of conditions. They are seen as an important leading indicator for the economy and, therefore, impact on Sterling, to which they are positively correlated.

What to Watch for the Euro

The main economic release for the Euro in the week ahead is inflation data out on Tuesday at 10.00 B.S.T.

Inflation data informs European Central Bank (ECB) policymaking, and if it rises the ECB is more likely to end its stimulus programme and start raising interest rates - a move which would be positive for the Euro.

Currently expectations for the first interest rate rise in years at the ECB is priced for the back end of 2019; bring that expectation forward and the Euro will find itself better bid.

Forecasters expect the inflation rate to remain at 2.0% in July and the Core rate to rise to 1.0% from 0.9% in June, on a year-on-year basis. A higher-than-expected rise in inflation, especially core would push the Euro higher.

Another key release for the Euro is Q1 GDP data, out at the same time as CPI, although it is a second estimate so is unlikely to surprise much either way.

Eurozone July PMIs are also scheduled for release during the week, but they too are second estimates so unlikely to move markets.

There are several German releases in the week ahead, including German retail sales in June and Unemployment in July - both out on Tuesday morning.

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