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British Pound Still too Risky to Buy, Downside Risks vs. Euro and Dollar Still Evident

An analyst at Swiss investment bank UBS suggests investors limit their allocation to UK assets – Pound Sterling included – until the current uncertainty around Brexit clears.

If the suggestion is heeded by investors, Pound Sterling could be in for a slow summer as professionals remain on the sidelines until the official exit day nears in October.

“Literally 100% of the conversations I have had with our clients, especially those based outside of the UK, have been about whether it is time to get back in, back into UK property, stocks and Sterling. But we just need the uncertainty to clear,” says Geoffrey Yu of UBS Wealth Management’s UK Investment Office.

The call by Yu comes as Sterling, like the broader currency market, enters a period of depressed volatility, with the Pound-to-Euro exchange rate seen hovering in the 1.15s and the Pound-to-Dollar exchange rate maintaining a small range around 1.30.

Evidence of the market’s desire to steer clear of Sterling is also apparent in positioning data that shows the market is now neutral after bets against the currency were steadily closed out over recent weeks.

In short, taking a directional bet on the currency is proving a hard ask for uncertain currency traders at present.

Analysts at UBS maintain “a long-term bearish Sterling bias”, noting it is 10% overvalued according to one of their preferred models used to gauge a currency’s valuation.

The suggestion that investors avoid Sterling and other UK assets comes despite strong wage data being released last week which some analysts had taken as a sign the Bank of England (BoE) might be tempted to raise interest rates sooner than previously expected. Typically steadily improving data – particularly wage data and inflation – plays positive for a currency as they signal the need for higher interest rates at that currency’s central bank.

As a rule-of-thumb, currencies tend to rise when central banks raise interest rates, and fall back when they cut.

Many economists however see policymakers leaving interest rates unchanged until the Brexit fog clears.

“Given the current uncertainty around the ‘B-word’ I think the BoE will probably remains on hold,” says Yu in an interview with Bloomberg News.

UK wages raced higher by 3.4%, and 3.5% including bonuses, in March but economists says this does not provide enough cause to expect the BoE to immediately ponder raising interest rates in the current political environment. “The UK labour market remains very tight which should be reflected in a further pick-up in wage growth,” says Elsa Lignos, a foreign exchange strategist with RBC Capital Markets. “The problem is that it cannot translate into expectations of BoE hikes while Brexit uncertainty persists, and so it is hard to make it a positive GBP story.”

Some economists have even suggested the strong wage growth is in fact another symptom of Brexit uncertainty with businesses opting to invest in staff instead of investing in more expensive new equipment. “In a period of acute uncertainty over Brexit, firms chose to invest in people – who remain relatively cheap – rather than make long-term bets on expensive capital, such as new premises, machinery or software,” says Mike Jakeman, senior economist with PwC.

The BoE will therefore arguably be quite content to allow a ‘nice buffer’ of real earnings to exist between inflation and income growth. This will allow the “BoE to probably focus on other things,” says Yu.

Indeed, Sterling barely reacted to the release of strong labour market data on April 16, suggesting the market wants to see a substantial move for the better in UK data before it bids Sterling.

What would have driven the Pound in the past simply doesn’t have the same clout in 2019.

Concerning the Pound’s outlook, UBS are forecasting a lower Sterling against the Euro over coming months with the Pound-to-Euro exchange rate forecast to trade at 1.1236 by year-end.

The Pound-to-Dollar exchange rate is however forecast to trade at 1.35, reflecting a broadly softer Dollar environment.

“Risks of a ‘no deal Brexit’ have subsided and Eurozone political tensions appear contained. We are however still cautious on the GBP as continued uncertainty weighs on the macro outlook and prevents a more meaningful Sterling recovery,” says Vassili Serebriakov, a strategist with UBS.

A Stronger Pound Ahead say Citi Eyeing an August Interest Rate Rise

Once Brexit is resolved, and assuming not by a hard-Brexit, the Pound is at risk of a strong appreciation since UK assets are a ‘buy’ candidate on the basis of raw economic fundamentals.

Analysts at Citibank, the largest foreign exchange dealer in the world, are a little more optimistic and have shifted from a ‘wait-and-see’ on interest rates to envisaging the possibility of a rate hike in one of the five remaining Bank of England meetings this year.

Citi analysts see domestic inflationary pressures rising in the UK, citing strong wage growth driving up prices.

“There are 5 BoE meetings left in 2019. The fresh Brexit extension (to October 31) allows for some breathing space and if UK data holds up, the August meeting might then become more ‘live’ than markets anticipate,” say Citi in a recent client briefing. “A grab-and-go BoE rate hike may be possible in August.”

Pessimistic global growth forecasts had been a major headwind to the outlook for the UK economy but these too have eased since the release of better-than-expected data from China out last week, which showed GDP, retail sales and trade data, all rising strongly, and helped negate hard-landing concerns for the world’s second-largest economy.

The BoE cited the global growth slowdown as a temporary negative factor for the UK economy in its February policy statement.

“Global growth is expected to dip below trend in coming quarters, weighing on UK net trade, before rising to around potential rates. Activity is projected to be supported by the more accommodative monetary policies in all major economic areas that markets now expect,” says the February policy statement from the Bank of England.

If these concerns ease, therefore, the Bank might raise their forecasts.

An improved outlook for global trade as a result of positive reports from negotiations between the U.S. and China has further supported the outlook for global growth, the UK included.

These exogenous factors are likely to support the outlook for Sterling and possibly raise the chances of an earlier BOE rate hike than previously expected.

Currently, the market is discounting only one 25bp hike over the next 3 years, “and will likely look for signals at the May board meeting where the majority of members will probably reject a rate hike, but could send “hawkish” forecasts and a dissenting vote (as a signal for a possible August hike,” say Citi.

Therefore, the view that the market is under-appreciating a rate rise at the Bank of England is a bullish one for Sterling, if proven correct.

Citi are forecasting the Pound-to-Euro exchange rate to trade higher at 1.1765 in three months, and 1.16 in six to twelve months.

They are forecasting the Pound-to-Dollar exchanage rate to trade higher at 1.34 in three months, and 1.37 in six to twelve months.

Source: Pound Sterling Live

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British Pound: ‘No Deal’ Brexit Odds to Rise from 15%, will Pressure Sterling Lower vs. Euro and Dollar

Pound Sterling will come under pressure if the odds of a no deal Brexit rise from 15%, which they surely will as the Conservatives forced into delivering Brexit on October 31 amidst fierce backlash from Brexit voters.

For now, the currency remains well supported against the Euro and U.S. Dollar assured that Brexit risks have faded and as global markets settle for the long Easter break amidst a sizeable drop in volatility.

Volatility has hit multi-month lows and should take the risk out of the markets as no major moves, either higher or lower are likely in such an environment.

The Pound-to-Euro exchange rate is currently quoted at 1.1556, as the Pound endures a slow-burning move lower against the Euro which appears to be benefiting from an uptick in global investor sentiment.

The Euro is certainly the driver of this pair for now.

The Pound-to-Dollar exchange rate is quoted at 1.3029 and while intra-day over are limited the pair is also making a slow grind lower towards the key 1.30 marker.

Complacency

Of course, the lack of volatility could also just as well be a precursor to sizeable ‘breakout’ moves, and we await potential triggers.

For Sterling, we note markets are becoming increasingly complacent with regards to the potential risks surrounding Brexit over coming months. And, for us a potential trigger that could ignite a substantial move in a complacent market would be a rapid repricing of ‘no deal’ Brexit risks.

The Pound tends to rise as ‘no deal’ Brexit becomes less likely, as has been the case during the first-quarter of 2019 in which the currency was the best-performing major currency. It tends to fall when ‘no deal’ Brexit risks rise.

The market is relaxed on the prospect of a ‘no deal’: there is now a greater chance the UK will not leave the EU at all than of the UK leaving the EU without a deal in October, according to a poll of institutional economists.

A Reuters poll out on Thursday shows the median probability of a ‘no deal’ Brexit is at 15%, the lowest since Reuters began asking in July 2017.

Only one of 51 respondents gave a value over 50%.

The findings show the favoured outcome amongst analysts is the two sides reaching a free-trade deal.

Joining the European Economic Area was held to be the second most likely outcome.

Revoking Article 50 and cancelling Brexit entirely was held to be the third most likely outcome ahead of leaving the EU under World Trade Organization rules.

The UK embarked on the road to a softer Brexit when the EU granted ab extension to the Article 50 process until October 31.

Prime Minister Theresa May made the request for a delay based on her desire to reach a deal with the opposition Labour Party that would allow for an exit deal to be ratified by a deeply divided parliament. Talks are ongoing.

“The key conclusion here is that the government (albeit not unified) has agreed to seek a Brexit compromise with Labour that will inevitably be a softer version of the
May deal. This will either lead to a compromise deal (Customs Union/Common Market 2.0) or we will have a third attempt at reaching a plan through votes in parliament. So these developments are positive for the Pound,” says Derek Halpenny, a foreign exchange strategist with MUFG in London.

So while developments are positive for the Pound, we fear the pricing of ‘no deal’ Brexit risks at 15% remain too low.

“Risks of a ‘no deal Brexit’ have subsided and Eurozone political tensions appear contained. We are however still cautious on the GBP as continued uncertainty weighs on the macro outlook and prevents a more meaningful Sterling recovery,” says Vassili Serebriakov, a strategist with UBS.

Often a one-side consensus view can result in a powerful counter-move when that consensus is shattered.

But Sterling Bulls Could Face a Rude Awakening if Odds of ‘No Deal’ Rise

A potential injection of volatility into Sterling markets will almost be political in nature.

A startling poll on Westminster voting intentions from Comres on Thursday shows support for the Conservatives has plummeted to 23%, well below Labour’s 33%.

A YouGov poll, also out Thursday, shows the Conservatives on 29%, Labour on 30% and the Brexit Party on 14%.

The Conservative’s appear to have haemorrhaged support to the newly-formed Brexit Party who opened their account on the Comres polling series with 14% of the vote.

A political shakeup following May’s European elections, and more importantly, local elections are now increasingly likely as the Conservative party is facing a potential wipeout.

“The main known unknown in the next two months is the EU elections in May. The UK government is ideally looking to get a Brexit deal in place to allow the UK to not participate. The coiling/contracting range of GBPUSD in particular shows potential for a break-out in that time-frame,” says Robin Wilkin, a Cross Asset Strategist with Lloyds Bank.

Other polling out this week shows the Brexit Party are on course to win the European Election as leader Nigel Farage looks to capitalise on the discontent brewing amongst the UK’s leave-voting electorate.

“In a development that must have European leaders eating their hats Nigel Farage’s Brexit party has surged in the polls as the clear leader to win in European elections. The party which was only formed in January has overtaken Labour, the Conservatives and UKIP as the likely winner. Whether related or not the pound, which has been the barometer of all things Brexit, is nudging lower,” says Fiona Cincotta, Senior Market analyst with City Index.

Heavy losses by the Conservatives could place immense pressure on Prime Minister Theresa May to abandon talks with the Labour Party, or stand down.

Whether May stays or not, the Conservative Party will almost certainly pivot towards delivering Brexit at all costs on October 31 in order to remain relevant with the electorate. In all likelihood the EU won’t renegotiate the deal they have offered, and with this deal lacking parliamentary backing a ‘no deal’ would become increasingly more likely.

All outcomes we believe would rapidly raise the odds of a ‘no deal’ Brexit in October from the current benign weighting of 15% held by economists.

The implications for Sterling could be notable as we know the currency tends to struggle when the odds of a ‘no deal’ increase.

“There will be huge political fallout from the further Brexit delay. The tight ranges in EUR/USD and GBP/USD and the further compression in volatility (which is probably not over yet) partly reflect the fact that FX investors do not know how to quantify these political risks, nor are they able to estimate the economic effects,” says Stephen Gallo at BMO Capital Markets.

Like a coiling spring, Sterling could in fact be a currency that is loaded and ready to be triggered in either direction, depending on the nature of that trigger.

We feel that at present the conditions are aligned to a rude surprise for a complacent market.

Written by Gary Howes

Source: Pound Sterling Live

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Bank of England Stand by View Pound Sterling Can Suffer Deep Falls on Disruptive Brexit

Bank of England policy makers have stood by analysis suggesting the British Pound is at risk of losing substantial ground in the event of a disruptive ‘no deal’ Brexit taking place in 2019.

“The fall (in Sterling) since the referendum represents the market’s view on a range of possible outcomes. And essentially the larger the effect on UK trade, the UK exit, the further the sterling is likely to fall, for various reasons. So at the moment what is ‘priced in’ to the level of the exchange rate is a number of possible outcomes,” says Ben Broadbent, Deputy Governor of the Bank of England.

Broadbent and other Bank of England were giving evidence to parliament’s Treasury Select Committee about a BoE report on the potential economic impact of Brexit in Britain’s parliament on Tuesday.

“So if the eventual exit is towards the better end of that range, you would expect sterling to rise from here, if it’s towards the worse end of that range, you would expect it to fall further. And generally, the greater the economic dislocation, the worse the exchange rate is going to be, there’s a direct relationship,” adds Broadbent.

Bank of England Governor Mark Carney adds that currency market participants have not yet fully factored in a disorderly Brexit into the price of Pound Sterling, suggesting to us that the Governor sees the potential for deeper falls in the value of the currency.

On November 29 the Bank of England released a ‘war gaming’ analysis of the potential impact to the UK economy of various Brexit scenarios.

Notably, a disorderly ‘no deal’ Brexit could crash Sterling, which would in turn force the Bank of England to hike interest rates sharply towards the 5.5% mark in order to combat inflation stemming from the currency’s decline.

According to the analysis, aimed at testing the resilience of the UK financial system, if Prime Minister Theresa May fails to pass her Brexit plan Sterling would fall 25% under a worst-case scenario.

Source: Pound Sterling Live

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Sterling steadies after Brexit sell-off

The pound rose on Tuesday after a heavy sell off by investors concerned Britain could soon crash out of the European Union without securing a trade deal.

Sterling sank to an 11-month low on Monday after Britain’s trade minister Liam Fox suggested the UK could leave the EU in March without a deal in place to ensure future relations with the bloc, its biggest trading partner.

The pound has fallen more than eight percent since April and with the government yet to agree a divorce deal with Brussels, currency traders are growing edgy about its outlook.

A lack of Brexit headlines and a pause in a rally by the dollar on Tuesday brought some respite for the currency, however analysts said that would likely only be temporary.

“The more we hear the phrase ‘no-deal Brexit’, the more likely the pound will be kept under the cosh,” said David Madden, a market analyst at CMC.

“The British side might give off the impression they would be content without a deal in order to force Brussels’s hand the pound could be in for a rocky ride in the near-term.”

Sterling edged up 0.2 percent to $1.2973, away from Monday’s trough of $1.2920, its lowest since July 19.

It remained broadly flat against a resurgent euro at 89.35 pence.

A stronger-than-expected reading of Britain’s second-quarter growth data on Friday could lift the pound further but even a rebounding economy will struggle to reverse the pound’s fortunes so long as a cliff-edge Brexit remains on the horizon, analysts say.

“GBP-bulls who are waiting for the data on Friday are having to endure quite a lot of pain,” said analysts at Commerzbank in a note.

“How positive can the data – that only ever describes the past – actually become to be able to cover up the risks the UK economy is facing?”

If Britain leaves the EU without a transition agreement, it would revert to trading under World Trade Organization rules.

Most economists think that would cause serious harm to the world’s fifth largest economy as trade with the EU, Britain’s biggest market, would become subject to tariffs.

Supporters of Brexit say there may be some short-term pain for Britain’s $2.9 trillion economy, but that long-term it will prosper when cut free from the EU and able to strike trade deals with faster-growing countries and regions elsewhere.

Source: UK Reuters

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Sterling falls after May bows to Brexit pressure in parliament

The pound fell on Monday as a debate in Britain’s parliament exposed the level of dissatisfaction within British Prime Minister Theresa May’s governing Conservative Party over her plans for Brexit.

The pound fell to an intraday low of $1.3223 on news that May had bowed to pressure from Brexit supporters and accepted their changes to a customs bill that underpins Britain’s exit from the EU.

“The move in sterling is pretty contained at this point but this [accepting of amendments] is being viewed by the market as a step towards a leadership contest,” said Jordan Rochester, currencies strategist at Nomura.

Eurosceptics say May’s plan leaves Britain too close to the European Union and are trying to force her to change course, while pro-EU Conservative lawmakers say it leaves the country too distant from its biggest trading partner.

Sterling has struggled to capitalise in recent weeks on signs that the economy is improving because of mounting uncertainty over whether Britain can secure a trade deal with the EU before it leaves the bloc next March.

Markets expect the Bank of England to hike interest rates in August but the British currency has fallen 9 percent since April partly because of the wrangling within May’s party.

May is expected to survive Monday’s debate on a customs law but the debate risks undermining the government and increasing the chances of an early election which would hurt the pound.

“Political uncertainty helps to explain why the pound has not strengthened yet on the back of the government’s plans for a softer Brexit,” said analysts at MUFG.

At 1545 GMT the pound was down 0.1 percent versus the dollar at $1.3224 and down 0.3 percent against the euro at 88.52 pence..

Sterling finished last week down one percent against the dollar, its biggest weekly drop since late May.

President Donald Trump’s visit to the UK last week added to uncertainty about the Brexit talks and Britain’s trade relationship with the United States after the divorce. Trump criticised May’s handling of the Brexit talks.

May attempted to face down would-be eurosceptic rebels by warning on Sunday that if they sink her premiership then they risk squandering the victory of an EU exit that they have dreamed about for decades.

Meanwhile over the weekend, German business groups told members to prepare for a hard Brexit.

Long bets on sterling have been whittled down in recent days with overall net positions mildly bearish on the currency, positioning data shows.

Source: UK Reuters

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Sterling falls to lowest against dollar since November

The pound fell to a six-month low against a rallying dollar on Tuesday, while it held its own against a euro dragged down by concerns about a deepening political crisis in Italy.

Sterling has slumped against the dollar since mid-April as expectations of a Bank of England interest rate rise recede and the economy shows signs of prolonged weakness.

Renewed concerns about whether Britain can secure the Brexit deal it wants have also impacted the currency.

Against the dollar, the pound slid as much as 0.7 percent to $1.3205, its weakest since mid-November. The British currency, previously one of the best performers in 2018, is now down more than 2 percent versus the dollar so far this year.

 “We can ascribe a lot of it (pound weakness) to the U.S. dollar but I think sterling has been on the back foot independently,” said Jane Foley, an FX strategist at Rabobank, citing relatively downbeat UK retail sales and inflation data published last week.

Investors are only pricing in a one-in-three chance of the Bank of England raising borrowing costs in August, the next time it updates its economic forecasts.

 “There is nothing in there to restore confidence in the BoE’s ability to raise rates,” Foley said.

David Madden, an analyst at CMC Markets, said the pound remained “in its downward trend” and pointed to $1.32 as a key target.

Versus the euro, sterling has performed much better, and at GMT 1515 on Tuesday traded up 0.3 percent at 87.12 pence per euro.

Worries about divisions within the British government about whether it wants to remain in a customs union with the European Union after it leaves the EU in March 2019 have undermined sentiment towards the pound ahead of an EU summit in June.
However, the euro’s rapid descent – caused by investors buying into dollars and concerns about political uncertainty in Italy – have underpinned the pound and it remains up versus the single currency in 2018.

Source: UK Reuters

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Pound drops to five-month low after UK GDP slumps

The pound eased in afternoon trading today, following a disappointing second estimate of first-quarter GDP growth from the Office for National Statistics (ONS).

Sterling was down 0.31 per cent to trade at $1.3339 against the dollar, its lowest level since mid-December last year.

Lukman Otunuga, Research Analyst at FXTM said:

“This has already been a terrible trading week for the pound, as cooling inflation figures dented expectations over the Bank of England raising UK interest rates in August.

“Matters worsened on Friday following reports that UK economic growth dropped to its lowest rate since 2012.”

Figures from the ONS showed that UK GDP grew just 0.1 per cent in the first three months of the year, a sharp drop from the 0.4 per cent growth seen in the final quarter of 2017.

ONS figures also showed that GDP per capita shrank by 0.1 per cent between the fourth quarter of 2017 and the first three months of this year.

The country’s economic growth was heavily weighed down by a 2.7 per cent drop in construction output and a 0.2 decrease in business investment.

Household spending grew by just 0.2 per cent, the lowest growth since 2015.

The ONS warned of a “pattern of slowing growth, in part reflecting a slowing in the growth of consumer-facing industries”.

​John Hawksworth, chief economist at PwC, said: “Overall, the figures confirm the view that UK growth was subdued in the first quarter, though we continue to believe that this overstates the underlying weakness of the economy, bearing in mind the strong jobs growth we’ve seen.”

The dollar was steady against a basket of major currencies this morning ahead of the upcoming speech from Federal Reserve chair Jerome Powell.

Source: City A.M.

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Sterling rises as strong housing data cements May rate hike bets

The British pound rose against a mostly firmer dollar on Monday and was on track for a third consecutive day of gains as investors were encouraged by data showing British house prices rising more than expected in March.

Since Britain signed a transition agreement last month to cover the 21-month period after it leaves the European Union, concerns about Brexit have abated as investors focus on the state of the UK economy before an expected interest rate rise in May.

Sterling rose 0.1 percent against the dollar to $1.4104 on Monday after mortgage lender Halifax said that house prices rose by a stronger-than-expected 2.7 percent in the first three months of 2018.

The data is likely to bolster expectations that the Bank of England will raise rates next month by a quarter percentage point and reduce fears among investors that Britain’s economy is too weak to stomach a second hike later in 2018.

However, house prices are still rising much more slowly than before the 2016 referendum decision to take Britain out of the European Union which hit confidence among many households as the pound’s fall pushed up inflation.

“House prices recovering somewhat is a welcome piece of news given that one of biggest concerns after Brexit is how UK households will deal with falling house prices,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole.

Marinov said he had a moderately constructive view on the pound for 2018 and that with Brexit concerns on the back burner sterling could start to outperform a range of currencies, as oppose to just the dollar which has been weakened by U.S.-China trade war fears.

“The pound seems to be emerging from under the Brexit cloud. The next time we’ll start focusing on Brexit may be well into the third quarter so ahead of that we’re really left with economic data to focus on,” he said.

But some analysts say uncertainties over Brexit remain and that broad dollar weakness is keeping sterling above $1.40.

Against the euro, the pound strengthened 0.2 percent on Monday to 87.04 pence

Traders last week largely shrugged off tepid survey data and searched instead for more meaningful signs of economic weakness that could deter the BoE from its path of monetary tightening.

Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

Source: Reuters

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Sterling starts April on the up as Brexit risks take backseat

The pound held steady against a mostly firmer dollar on Tuesday as data showed British manufacturing gaining a bit of momentum and investors shifted their focus from Brexit to the state of the UK economy ahead of an expected rate hike next month.

On the first day of European trading after a long weekend, the pound gained 0.3 percent versus the euro, helped by broader weakness in the single currency.

Against the dollar, sterling held its own as the greenback staged a recovery against other currencies.

“It does look as if sterling is starting to stabilize somewhat, with the currency maintaining a tight range in recent days just above that $1.4 level,” said Eric Theoret, a currency strategist at Scotiabank.

Theoret said a moderation in the tone of Brexit rhetoric since Britain last month secured a transition deal with the European Union for its exit from the bloc would help the pound perform well this quarter against the dollar and the euro.

Against a rebounding dollar, sterling shed 0.1 percent to $1.4037. It hit 87.335 pence per euro.

Major banks are split over sterling’s direction in the coming months.

Expectations the Bank of England could raise interest rates as early as May have helped sterling outperform most major currencies this year.

But some investors remain sceptical about the odds of policy tightening because of lingering economic uncertainties.

They say it is mainly the broad weakness of the dollar – linked to a trade dispute between the United States and China – that is keeping sterling above $1.40.

SEASONAL STRENGTH

Traders on Tuesday also pointed to the strong historical performance of the pound in April, when it tends to rise versus the dollar as foreign companies hand more dividend payments to British shareholders.

The UK Manufacturing Purchasing Managers’ Index (PMI)released on Tuesday inched up to 55.1 in March from a downwardly revised 55.0 in February, beating the 54.5 consensus in a preliminary Reuters poll of economists.

Tuesday’s PMI data also showed manufacturing growth had cooled to a one-year low in the first quarter of 2018 as the economy remains on a slow but steady course a year ahead of Brexit.

“The manufacturing data, combined with seasonal trends in the price action of the pound this time of year explains sterling’s strength,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole.

Marinov said investors would turn their attention to data on Britain’s dominant services sector due out on Thursday, which should help gauge the strength of recent economic activity.

Source: UK Reuters

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Pound-to-Euro Rate Forecast for the Week Ahead

Pound Sterling peaked at 1.1525 against the Euro last week after a combination of easing Brexit fears and continued expectations that the Bank of England (BOE) will raise interest rates drove the UK currency higher.

GBP/EUR rose up to the top of its long-term range but then lost momentum and fell back down to the 1.1430/40s, where it spent most of Friday plateauing.

Pound-to-Euro Rate Forecast for the Week Ahead Commercial Finance Network

Our analysis of the technical structure of this market shows the sell-off was prevented from going lower by the R1 monthly pivot at 1.1430, which has put a firm floor under the Pound which could underpin the currency over coming days.

Pivots are price levels used by professional traders to gauge the trend and as entry points for buy and sell orders; they therefore are likely to have an influence on future market direction.

When a falling currency touches a pivot it can often bounce back up.

Pound-to-Euro Rate Forecast for the Week Ahead Commercial Finance Network

The effect is exacervated by short-term technical traders betting on the bounce and thus adding to the buying pressure.

It is not surprising therefore that the exchange found extra support at the pivot and it is possible this could be a platform for a reversal and the pair to start going higher again.

This is our base case scenario since the short-term trend is still bullish.

In our last forecast we also talked about how the pair was now trading in between the 10 and 20 period moving averages (MAs) on the four hour chart, which was traditionally considered a ‘buy zone’, which means an optimum level to buy the asset and join the dominant uptrend (in expectation of higher prices).

We further noted that we were on the lookout for a bullish reversal candle to form inside the buy zone to provide confirmation of a resumption of the uptrend.

Although we did get a long green bullish candle developing in the buy zone, a ‘bullish engulfing’ candle pattern (circled above), it was followed by weakness and due to lack of follow-through, we consider it not a very reliable signal.

If another more reliable bullish candlestick were to form at the current level and in the buy zone between the 10 and 20 MAs, such as one of those featured in the illustrations below then we could forecast a move up to a target at the 1.1525 first, followed by the 1.1550 range highs/upper channel line.

The range highs will continue to present an obstacle to higher prices as it forms the upper limit of a band that has been in place for six months now (see pic below).

Pound-to-Euro Rate Forecast for the Week Ahead Commercial Finance Network

The ceiling of the range, therefore, will probably reject the exchange rate as it has done on multiple occasions in the past (circled in red above).

Nevertheless, there is also a possibility the pair could break out of the range altogether, but, for confirmation, we would ideally need to see a break clearly above the range highs.

Another monthly pivot, the R2, is situated just above the range highs at 1.1581, and it is likely to be a further obstacle to the uptrend.

Therefore, we would ideally like to see a break above 1.1620, for confirmation of a clearance of R2 and the start of an extension up to the next target at 1.1770.

This is the minimum price objective calculated using the traditional technical method of taking the golden ratio (0.618) of the height of the range and extrapolating it higher from the break.

On balance, we see a greater overall chance of an upside breakout of the range eventually, rather than a downside breakout, for reasons outlined in our previous article on the pair here.

Data and Events to Watch for the Pound in the Week Ahead

Overall it is a relatively quiet week for the Pound on the calendar and the most likely source of volatility will probably be the ongoing Brexit debate.

The Pound strengthened last week after a transitional agreement was agreed by the EU in Brussels, which will now see the UK extend its stay by 21 months after the March 2019 deadline, on special terms, whilst a comprehensive trade deal is hammered out.

Brexit headlines are of course impossible to predict as they are generated by politicians and we will be monitoring the newswires for any potential points of interest.

From a purely hard data perspective, the main release is the third estimate of Q4 GDP on Thursday at 8.30 GMT, although the consensus sees little chance of a change from the second estimate of 0.4% growth quarter-on-quarter.

“The more significant interest for next week’s publication will come from the national accounts detail released at this time,” says Investec of the GDP release. This will include revisions to data on household income and personal finances in general, which affect overall consumer spending, the biggest driver of growth for the economy.

Should growth be downgraded unexpectedly we would certainly expect a soggy end to the shortened week for the Pound.

Current account data for Q4 is also out on Thursday, March 29, at 09.30, and is forecast to show the deficit widening to -24.0bn from -22.8bn previously.

Traditionally the current account was always seen as a major influence on currency levels but now there appears to be little empirical evidence of a link, so we do not see much volatility arising from this release.

The CBI Distributive Trade Survey for March is out on Wednesday, Mach 28 at 10.00 GMT and will provide the latest data on the retail sector.

“Launched in 1983, this widely followed survey covers questions on sales, orders, stocks, general business situation, employment trends and internet sales,” says the CBI website.

Other March data includes Gfk Consumer Confidence, which forecasts to remain at a -10 reading the same as February.

Investec, however, sees a chance of a lift to -8 in March because of rising wages, less job uncertainty, easing inflation, the agreement of a Brexit transition deal and “the uncharacteristically “Tiggerish” Chancellor at his inaugural Spring Statement.

Other data in the week ahead includes mortgage approvals on Monday at 8.30, Nationwide house prices on Thursday at 6.00 (watch for a negative result as this would make two negative months in a row and be bearish for Sterling); business investment on Thursday at 8.30, consumer credit at the same time and mortgage lending also at the same time.

Data and Events to Watch for the Euro in the Week Ahead

The Euro showed vulnerability last week after manufacturing and services data for March showed a continued slowdown and it is against this backdrop of slowing growth than the currency will be assessed in the coming week.

The next major set of releases for the Euro is inflation out the week after next, with only Germany inflation out in the week ahead, on Thursday at 13.00 GMT.

German inflation is not expected to be representative of inflation dynamics in the rest of the Eurozone, however, so it may have limited impact, according to analysts at Nordea Bank.

“We caution against reading too much into German inflation figures out next Thursday as the Easter effect could distort the picture – this month to the upside,” says Martin Enlund at Nordea Markets.

Eurozone loan growth and money supply for February, meanwhile, are out on Tuesday, March 27, at 9.00. The former is forecast to rise by 3.0% from 2.9% in January and the later to remain at 4.6% – the same as the previous month.

Loan growth and money supply are important for the Euro as the indicate credit dynamics and more take up or availability of credit is usually a positive sign for the economy, and therefore the Euro.

A whole load of sentiment indicators is scheduled for release at 10.00 on Tuesday, including the final estimate for consumer confidence in March, industrial, services and economic sentiment in March and business confidence also for March.

Source: Pound Sterling Live