The Pound-to-Euro Rate's Forecast for the Week Ahead - PSL
- Written by Joaquin Monfort
- GBP/EUR has probably broken above long-term range highs and is expected to rally
- The main release for the Pound is probably employment data
- For the Euro, ZEW sentiment data is the most important data point
© Andrey Popov, Adobe Stock
The GBP/EUR pair surged higher last week, breaking well above the key 1.1500 level and reaching a peak of 1.1590, the question now is, will the uptrend continue in the week ahead?
We have already reported that a number of noted technicl analysts we follow have confirmed momentum now lies behind Sterling, and as such they have reiterated the next upside targets they believe are attainable, these targets can be found in our coverage here.
Our own studies suggest it to be plausible to expect further upside, but we would ideally like to see further confirmation first.
GBP/EUR does now, on balance, seem to have succeeded in breaking out of the top of the sideways range it has been in for over six months:
When prices breakout of long-term, sideways, ranges, they usually move higher the same distance as the height of the range extrapolated higher, or the height of the range multiplied by the golden ratio (0.618).
A continuation by the height of the range would lead to a target at 1.1885, an extension multiplied by the golden ratio, would reach 1.1752.
Both are valid targets, however, we have established an initial target at 1.1720 at the level of the R2 monthly pivot.
Pivots are price levels used by professional traders to gauge the trend and as entry points for buy and sell orders; they, therefore, tend to have an influence on future market direction.
When a rising currency pair touches a pivot it often pulls-back, almost always stalls - except in very fast-moving markets - and sometimes even reverse's trend completely.
A condition for the continuation of the trend higher is that it breaks above Friday's 1.1590 highs.
It is not certain yet that the pair has broken successfully above the top of the range since that depends on where the analyst chooses to draw the upper boundary line - there are several possible alternatives - some resulting in a higher ceiling than others.
Therefore, there is still the possibility of a temporary breakdown, especially as Friday's price action has formed a negative Japanese candlestick called a 'gravestone doji' (see below) which is often a sign of a market top.
Longer-term, however, we remain bullish the pair as has been our stance for several months now.
The pair was in an uptrend prior to the formation of the range and this usually means it will continue higher afterward.
The 'look and feel' - for want of a better expression - of the chart also more strongly suggests an upside breakout rather than a downside break; we would argue a break out of the bottom of the range simply wouldn't look 'right', given the prior market's form.
Thus we maintain our view that the pair will move substantially higher on the condition that the highs of the gravestone doji situated at 1.1590 are broken.
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Data and Events to watch for the Pound
A big week in terms of data for the UK in the coming week with labour market, inflation and retail sales numbers all on tap.
The Pound has enjoyed a strong start to 2018 as concerns and uncertainties relating to Brexit fade. As a result, analyst Viraj Patel at ING Bank N.V. believes Sterling will now start to pay more attention to data. "It appears that we’re back to good old-fashioned UK data watching to determine the short-term direction for the currency," says the analyst. "The week ahead shouldn’t disappoint here given the array of key data releases to watch out for."
On Tuesday, April 17 we have labour market data with markets looking for employment to increase by 13.3K in the quarter to March.
The Unemployment rate is forecast to stick at 4.3%.
Most important for the Pound will be wage data; as it is wage data that the Bank of England will be watching when it comes to raising intent rates with the rule of thumb being that higher wages should prompt interest rate wages which are in turn supportive of Sterling.
The average earnings index, with bonuses, is forecast to have risen 3% in February. If this number is missed, expect the Pound to struggle.
"We think signs of firming wage growth next week may seal the deal for a May BoE rate hike," says Patel.
If unemployment stays at 4.3%, however, some analysts estimate this is not sufficiently low to have an inflationary effect on wages, since the level below which that would be expected to occur - known as NAIRU - is now 4.25%.
"The UK job report will be closely watched. Last month the unemployment rate jumped to 4.3%, above the most recent NAIRU-estimate by Bank of England of 4.25%. Bank of England projects a relatively sharp increase in wage growth this year? Why should wage growth pick up materially, if unemployment is above NAIRU?," questions Andreas Steno Larsen, senior strategist at Nordea Bank.
Inflation data on Wednesday, April 18 will also be key with economists forecasting the headline CPI rate to be at 2.7%, unchanged from the previous month.
Calling Sterling's reaction to this is tricky as the traditional rule of thumb is higher inflation = a positive reaction in the Pound as it should mean the Bank of England will need to deliver more interest rates. This should still be true.
However, falling inflation also means the squeeze on consumers is fading as pay growth starts to finally creep ahead of inflation - and this is good for the economy. And what is good for the economy is good for the Pound.
The inflation data could therefore offer a win-win for Sterling.
Nordea's Larsen sees a material chance of inflation undershooting expectations as the effect of the previously cheap Pound wears off.
"Remember how everyone was caught by surprise when inflation exploded in UK during 2017 as a result of the massive weakening of the GBP. Will everyone be equally surprised now that the currency effects will start to fade out of the UK CPI? We tend to think so," says the strategist, hinting at a bearish outcome for Sterling.
"We don’t buy into the current market pricing of Bank of England and while a hike in May seems settled, there is no big reason to expect Bank of England to hike anytime soon thereafter. Therefore, we are also very sceptical about the fundamentals behind the recent GBP strengthening," says Larsen.
Finally, markets will be watching retail sales on Thursday, April 19 with economists forecasting a reading of -0.5% thanks to the inclement weather seen in March.
"Retail sales figures (Thursday) should reveal that the heavy snowfall in March hit the sector hard, with sales volumes contracting sharply on the month says Liam Peach, an economist with Capital Economics.
We therefore reckon markets are likely to discount seasonality into this month's data and instead look for next month's data for direction.
Data and Events to Watch for the Euro
The week ahead looks likely to be rather quiet for the Euro from a data perspective.
The main release is probably the ZEW economic sentiment gauge out on Tuesday at 10.00 GMT.
This is considered a reliable forward indicator of economic growth in the region so is widely watched.
The ZEW in March is forecast to fall in the Eurozone to 7.3 (economic sentiment) from 13.4 previously and this would be likely to have a negative effect on the currency.
The same gauge in Germany alone is forecast to enter negative territory, falling to -0.8 from 5.1.
The meeting of the European Council of Eurozone finance ministers could also impact on the Euro depending on reports from discussions at the meeting. This event starts on Wednesday, April 18.