The Pound-to-Euro Exchange Rate in the Week Ahead: Looking More Bullish
Above: The Bank of England MPC. The latest policy update is due this week and could move Pound Sterling. Image © Bank of England
- GBP/EUR has risen after news of progress towards a Brexit deal
- Price action appears to have made a technical reversal and is biased to go higher
- Bank of England and European Central Bank meetings dominate the calendar for Pound and Euro
The Pound-to-Euro exchange rate rose in the previous week; largely on the back of signs the EU and UK are still on course to strike a Brexit withdrawal agreement before year-end.
Moves were aided by comments from Michel Barnier, the EU's chief negotiator that headway was being made on Brexit loose ends, such as the Irish border question.
Separately he was also quoted as telling the Austrian chancellor that Brexit negotiations were 90% complete. The expectation that a deal will finally be brokered led to a rise in GBP/EUR from Friday's open of 1.1117 to a a new high for September of 1.1218.
In the week ahead key releases for Sterling include labour market data, heavy industry production data, and the Bank of England meeting on Thursday, September 13 - although no change in policy is expected and the impact on the Pound could be muted.
From a technical standpoint the pair is looking more bullish since Friday's upside break which took the exchange rate outside the down-sloping channel it has been falling in since June.
The upside breakout is a strong sign the pair will now climb higher to a potential target zone between 1.1265- 1.1335, which is roughly the height of the channel extrapolated higher.
The pair has also formed a piercing line bullish Japanese candlestick reversal pattern on the weekly chart over the last 3-week period, and has provided confirmation in the form a subsequent bullish week. This is also sign the pair will probably continue rising.
One major obstacle to further upside, however, is the 50-day MA situated at 1.1198. Large MA's tend to act as levels of dynamic support and resistance where trending prices often stall, pull-back or even reverse trend. In this case GBP/EUR appears to have pulled back so far.
Due to the presence of the 50-day MA we would want to see a re-break back above Friday's 1.1218 highs for confirmation of a continuation higher to the next target at 1.1265, which also happens to be roughly at the same level as the lower border line of a long-term rising channel, another potential resistance zone for the pair.
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The Pound: What to Watch
It is a busy week for UK data with several key data releases, and the Bank of England (BOE) meeting scheduled to finish on Thursday at 12.00 B.S.T.
The BOE raised interest rates by 0.25% at their August meeting but they are not expected to continue raising them in September.
Brexit uncertainty remains a key risk factor preventing them from going ahead - unless a deal is struck by Thursday, which seems a little unlikely even under the most optimistic scenarios.
"As for the BoE, which is scheduled to announce policy on Thursday of next week, we do not expect many new developments. The BoE raised its Bank Rate 25 bps to 0.75% at its August meeting, and further increases seem unlikely to be considered unless or until Brexit uncertainty is resolved," say analysts at global investment bank Wells Fargo in a recent client briefing.
The September meeting does not include a press conference or quarterly inflation report further reducing the chances they will use it to announce any changes in policy.
"The BoE last raised interest rates in August, lifting them above 0.50% for the first time since 2009. It is widely anticipated to hold rates unchanged at 0.75% next week. With no press conference and quarterly inflation report at the September meeting, the Pound may struggle to get much reaction from the BoE’s decision," say brokers XM in a preview of the event.
Another key event for the Pound in the week ahead is wage data which is scheduled for release at 9.30 B.S.T. on Tuesday, September 11.
Wages are leading indicator of growth and inflation pressures and a higher-than-expected increase would probably result in a rise in the Pound as it would increase the probability of the BOE raising interest rates.
Consensus expectations are for wages to rise by 2.5% in July from 2.4% previously (plus bonus). The Unemployment rate is forecast to remain unchanged at 4.0%.
Industrial and manufacturing production figures for July are out at 9.30 on Monday and are both forecast to show 0.2% growth from the previous month.
"Among the key releases will be industrial output figures, which will likely be closely watched for any clues that Brexit uncertainty is affecting manufacturing sentiment," say Wells Fargo.
Trade data is also out in the week ahead with the trade balance forecast to show a marginal widening to 11.75bn July, and Non-EU balance to show an increase to -3.30bn from -2.94bn previously, when the data is released at 9.30 on Monday.
Monthly GDP data at 9.30 and The National Institute of Economic and Social Research (NIESR) GDP mates at 14.00 are also out on Monday and could impact on the Pound if they present a negative outlook for growth.
The Euro: What to Watch
The main event for the Euro in the week ahead is the conclusion of the policy meeting of the European Central Bank (ECB) on Thursday at 12.45 B.S.T.
In June the ECB signalled it would be tapering its quantitative easing (QE) programme with a view to to ending QE altogether by the end of 2018 and many analysts see a good chance that it will reduce the volume of monthly asset purchases (probably from 30bn to 15bn) at the meeting this Thursday.
If it does it should provide the Euro with a boost, as it will confirm the ECB's roadmap to normalisation; if it doesn't it could weigh on the single currency.
A recent run of poor data - especially from Germany - and a surprise fall in inflation, coupled with increased political risk from Italy are major headwinds which threaten to derail the ECB's plans to curtail QE, and a taper on Thursday is not a 'done deal'.
Most major bank analysts, however, still appear to expect the ECB to remain on track to taper and not all recent data out of Europe has been poor, as evinced by the Eurozone PMI for August which in the end met expectations on their final revision.
Analysts at Wells Fargo don't see a change in policy happening at the September meeting.
"In our view, the ECB is unlikely to provide many new signals at its policy announcement next week, particularly given ongoing concerns around Italy and global trade. Instead, we believe it is more important to monitor the incoming European data flow for clues on whether the ECB might deviate from the policy schedule it laid out at its June announcement," say Wells Fargo.
The other main release for the Euro is ZEW economic sentiment in August, out at 10.00 on Tuesday.
The ZEW index showed a fall to -11.1 in July, the third negative reading in a row - an unusual run of bad data for the indicator.
The index is based on the balance of survey responses from 350 German financial experts and is considered a fairly reliable forward indicator for broader economic growth int eh region, so another negative reading could weigh on the Euro.
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