5-Day Pound-to-Euro Exchange Rate Forecast: Downward Channel in Command
Image © European Central Bank
- Pound Sterling recovery on Euro aided by progress in Brexit talks
- GBP/EUR is threatening to break out of restrictive falling channel and reverse trend
- Main release for Sterling are PMIs; for the Euro Retail Sales top the economic calendar
Sterling starts the new week on the defensive, thanks to some interesting headlines concerning the EU's chief Brexit negotiator Michel Barnier who indicates he is "strongly opposed" to Theresa May's Chequers plan.
Extraordinary comments that are clearly at odds with comments he made last week. Considering Chequers is the only plan in town it hints heavily at the UK and EU not reaching a deal. The market's reaction will be interesting.
The comments saw the Sterling-Euro conversion touch a low of 1.1064, having started the week at 1.1161. The Pound-to-Euro exchange rate made a last minute surge into the weekend after an acknowledgement from both sides in Brexit talks that progress continues to be made.
GBP/EUR ended the week with a one percent gain, ensuring those with international payment requirements were once again offered a lifeline with retail market rates peeping back above 1.10.
Although much has been made of the 'Barnier bounce' - a reference to last week's comments by Barnier that the the UK would be offered an unprecedented trade deal by EU standards - the gains are still relatively modest in comparison to historical market action.
Downtrend Intact
Our week-ahead technical studies are cautious.
Cautious because the weekly chart below shows that although the pair formed a strong green recovery candle last week (circled), and that it did so on a sharp increase in momentum (also circled in lower pane), it remains trapped within the confines of its falling channel.
As we cautioned last week, ideally we would want to see it breakout from the channel before entertaining the notion that the pair may be reversing its short-term down-trend. As long as it remains inside, it is vulnerable to further weakness.
A move above Friday's highs at 1.1187 would provide confirmation of a breakout and support a continuation up to the next target at 1.1215-20, where the 50-day MA is located.
Major moving averages tend to act as dynamic support and resistance levels where a trending exchange rate often stalls, pulls-back or reverses, so this makes it the ideal place to for the next target.
Another target in the 1.12s is the floor of the previous long-term range, as this too would be expected to provide robust resistance to any uptrending price action.
The only way prices would be expected to break above the 50-day and range-floor combo is if news around Brexit was exceptional, far reaching and game-changing.
The pair has the potential to rise all the way to 1.1324 where the 200-day MA is situated, since that would be equivalent to the height of the falling channel extrapolated post-breakout, which is a common method for estimating targets following channel breaks.
In support of the idea that GBP/EUR is undergoing a major trend-change is the observation that the pair has fallen a distance after the breakout below the range floor which is equal to the golden ratio (0.618) of the height of the range (labelled a and b), which is a method used to establish the conservative minimum targets for breakouts.
This partly suggests the short-term down-move may be complete and therefore supports the notion the market could be reversing higher.
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British Pound this Week: The Calendar Heats up Again
Beware, politicians return to work from their summer holidays; cue the inevitable bickering on what Brexit should look like.
Therefore headline risks rise again and Sterling might prove sensitive to any notable developments. Of course, politics is impossible to call so we will be watching for the unexpected.
Rehashing our #Brexit scenario analysis. We're edging to a world where there are solid signs of progress (upper left quadrant). There are near-term UK political hurdles to still overcome - which may keep $GBP upside in check. But growing confidence that short $GBP not attractive pic.twitter.com/UJfkCo9Ar4
— Viraj Patel (@VPatelFX) August 29, 2018
The calendar does however have some economic releases to watch as the new month commences.
The main releases to watch in the week ahead are manufacturing, construction and services Purchasing Manager Indices (PMI) data for August.
PMI's provide relevant, timely, data which often provides a reliable guide to future, broader, economic trends.
Manufacturing PMI is expected to slip from a 3-month low of 54.0 in July down to 53.8 in August when it is released at 9.30 B.S.T on Monday, September 3.
Manufacturing PMI has been in decline recently and further greater-than-expected weakness could weigh on Sterling, but as long as it remains above 50 - the level which differentiates expansion from contraction - it is unlikely to heavily influence the exchange rate.
Image courtesy of tradingeconomics
The construction PMI is less significant than the other two but it is released at the same time on Tuesday and is forecast to fall to 54.9 in August from 55.8 in July.
Services PMI is the most important release of the three as this sector accounts for over 80% of the UK's economy - economists are forecast a rise to 53.8 in August from 53.5 previously, when it is out at 9.30 on Wednesday. It is showing a more resilient if volatile progression.
Image courtesy of tradingeconomics.
Another key release for the Pound in the week ahead is the British Retail Consortium (BRC) retail sales monitor, which provides a useful leading indicator for broader high-street sales.
Halifax house price data for August is forecast to show a -0.2% fall compared to July but a 3.9% rise compared to August last year, when it is released on Friday at 8.30.
Although fluctuations in house prices can alert economists to the onset of deeper economic malaise with repercussions for Sterling, they have remained resilient of late and continue to rise overall.
Image courtesy of tradingeconomics.
The Euro: What to Watch
The Euro could be affected by the trade talks currently taking place between Eurozone and US negotiators in Washington.
Unfortunately the outlook for these talks is not particularly promising.
US President Trump originally asked for all tariffs to be dropped and the EU responded by offering him a free trade deal. Yet Trump has not accepted because, "... their consumer habits are to buy their cars, not to buy our cars," according to Bloomberg.
The US president said EU is 'as bad as China' in June when he imposed tariffs on iron ore, steel and aluminium. The EU retaliated with tariffs on iconic US brands like Harley Davidson and Bourbon.
On the 'hard data' front, the main release for the single currency is retail sales data for July, out at 10.00 B.S.T, on Wednesday, September 5.
It is expected to show a -0.2% result compared to the previous month of June, which is within the normal range. It is expected to rise 1.3% compared to July a year ago.
A larger-than-expected rise or fall would impact on the Euro because retail sales is a major component of growth since it is consumers who predominantly drive most non-export led economies.
Producer prices (PPI), also known as 'factory gate prices' are out at 10.00 on Tuesday September 4 and are forecast to show a 0.3% rise in July compared to June and a 3.9% annual rise.
PPI is often seen as heralding changes in broader inflation, which has been under pressure in the Eurozone recently. August inflation data showed a slide in both headline and core inflation of a basis point a piece, and this impacted negatively on the Euro, therefore, if PPI unexpectedly fluctuates it could have an impact, albeit marginal, on the single currency.
Eurozone Manufacturing and services PMIs are also out in the week ahead but these are final estimates so not expected to change much. The same goes for the second estimate of Q2 GDP.
Friday also sees a meeting of the Eurozone council of finance ministers, otherwise known as the 'Eurogroup'.
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