Pound-to-Euro Exchange Rate 5-Day Forecast: Outlook Deteriorates, 1.10s Possible

Image © SlayStorm, Adobe Stock

- Pound Sterling back below 1.12 on Brexit impasse revelation

- Short-term trend in GBP/EUR is now bearish

- More downside now likely to targets in 1.10s

At the start of the new week week Sterling the British Pound is seen trading near the previous week's lows with one pound buying 1.1135 euros.

Our latest technical studies on the exchange rate suggest the outlook has deteriorated and we look for further falls over coming days with any bounces in the Pound likely to be taken as selling opportunities by the market.

Theresa May's revelation on Friday, September 21 that Brexit negotiations were now at an impasse have significantly increased the chances of the U.K. leaving the European Union without a trade deal in March 2019; Sterling promptly fell by over 1.28% against the Euro on the news.

Only the day before GBP/EUR had been riding high on expectations the two sides were close to reaching an agreement, trading at a peak of 1.1301.

As a result of the news the price fell right down to Friday's close at 1.1118.

Prior to the fall, we warned the exchange rate had formed a bearish 'shooting star' Japanese candlestick pattern which requires a subsequent 'down-day' for confirmation of a bearish reversal, and this happened on Friday when the pair tumbled lower. The two days together provide a bearish short-term signal for the exchange rate.

GBP/EUR passed straight through the 50-day moving average (MA) at 1.1182 - another bearish indication.

The MA is now likely to provide a ceiling resisting future gains and suggesting the pair could be capped at that level.

The short-term trend has now almost certainly turned lower.

Normally we would expect more confirmation before calling a trend-change but Friday's sell-off was so savage it is probably enough on its own to signal further declines.

The first downside target for the pair is the 1.1076 August lows, followed by the 1.1051 September lows, and the 1.0991 lows of the year.

Advertisement
Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

The Pound: What to Watch this Week

Currency markets are likely to continue to be affected by the shockwaves from the Brexit bombshell dropped by May at the end of last week and we will be looking for any new proposals from both the U.K. and E.U. aimed at unlocking the stalled process.

This week, further matters to consider on the political front include whether or not the Labour Party will back a second referendum on Brexit; something that is likely considering polling of Labour Party members suggests well over 80% are in favour of such an outcome. Reports suggest Labour leader Jeremy Corbyn will accept the will of his party on the matter.

Also of note is a report in the Sunday Times that Theresa May might be left with little choice but to call another general election in order to both shore up her own position and to deliver her desired Brexit plan.

Reports suggest her aides are suggesting an election might be called in November: We believe if this were to happen it will inject a significant amount of downside into Sterling which detests uncertainty.

Political developments are likely to dwarf the few economic data releases on the calendar, including industrial trends data from the Consortium of British Industry (CBI) (Monday 11.00 B.S.T), the Nationwide house price index (HPI) (Friday 7.00), business investment (Friday 9.30), current account data (ditto), Q2 GDP revisions (ditto) and gross mortgage approvals (Wednesday 9.30).

None of the above are major market moving releases unless they deviate hugely from their expected results.

Possibly of more importance for the Pound could be what Bank of England (BoE) officials say in their speeches in the week concerning the strong run of economic data we have seen of late.

BoE Monetary Policy Committee (MPC) member Gert Vlieghe speaks on Tuesday at 9.40, MPC member and BoE chief economist Andy Haldane at 11.45 on Thursday, and MPC member Sir Dave Ramsden speaks at 14.20 on Friday.

"A busy week for the BoE, with appearances from Vlieghe, Haldane, Carney, and Ramsden. We'll be looking for any shift in position on the back of strong inflation figures, continued tightness in the labour market, and (perhaps) progress on the Brexit negotiations," says a note from the strategy desk at TD Securities.

In addition, the week ahead also sees the release of the BOE's Financial Stability Report, at 4.30 on Monday, which will contain clues of the BoE's thinking on the outlook for the economy, although their assumptions about the outcome of Brexit may already be out-of-date following Friday's shock breakdown in negotiations.

The Euro: What to Watch

September inflation data is the main release in the week ahead for the Euro given ongoing concerns about whether the European Central Banking (ECB) will stick to their plans to end monetary stimulus.

A lower-than-expected inflation result will lead to further speculation that the ECB could delay plans to remove stimulus and may weigh on the Euro.

Inflation was weaker-than-expected in August and there is a risk the same could happen in September.

The consensus forecast, however, is for headline inflation to rise to 2.1% (from 2.0%) and core inflation to rise to 1.1% (from 1.0%).

A result more in line with these figures could, actually, see the Euro rise instead.

The other main release in the week ahead is the ECB Economic Bulletin for August which will contain the central bank's latest views on the economy in the region, however, it is unlikely to see a major divergence from the views expressed in their most recent meeting.

Advertisement
Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here