Pound to Euro Exchange Rate: Week Ahead Forecast 

Pound Sterling has pulled reversed recent gains against th Euro after being rejected at highs at 1.18 and is seen valued at 1.1580 ahead of the new week.

Although the fundamental backdrop looks marginally more supportive to the Euro than the Pound, the charts are showing tough support could help the Pound towards the 1.15’s where we anticipate decent buying interest.

We favour a rebound in Sterling strength from around this point.

Studies suggest the pull-back from the 1.1800 highs looks to be a three-wave a-b-c correction which is probably complete.

The correction moved back 50% of the previous move, which is a significant Fibonacci retracement level where corrections often finish before the exchange rate resumes its trend higher.

The monthly pivot – a level used by traders to fade the trend – is close to the lows at 1.1589 and is likely to prove difficult to break beneath, also increasing the likelihood of a resumption higher.

If the pair rotates at these robust support levels and moves higher than a break above 1.1700 would confirm a continuation up to 1.1800.

Pound Still Weak Despite Bank of England Upward Revisions

The Pound failed to react positively to the Bank of England’s (BOE) upwards revision to their growth forecasts.

The revision was explained as resulting more from a surprising lack of downside after the referendum rather than an “improvement in the scenario”, according to Intesa San Paolo’s chief economist Luca Mezzomo

Continuing upside risks to inflation due currency weakness as well as uncertainty over Brexit have kept – and are likely to keep the Pound subdued.

“We confirm our expectations for a possible – albeit modest – weakening of the pound in the near term, mostly due to the new phase of uncertainty that will begin once the Brexit process is officially triggered,” said Intesa’s Mezzomo, who expects GBP/USD to fall to 1.20 at the bottom of its range.

On a broader macro point SocGen’s Juckes notes headwinds to Sterling appreciation from the UK’s large current account deficit:

“Sterling is stuck in a range. It’s very cheap on most measures, but then real yields are very low and the current account deficit is very big.”

Eurozone, a Quiet Performer

The Euro continues steadily appreciating as it reflects an equally slow but steady improvement in economic data.

Last week saw the release of better-than-forecast PMI’s which helped further boost the outlook for the economy and the currency.

The lack of traction in Core Inflation, however, is keeping European Central Bank officials cautious and guarded with both +President Draghi and Coure saying they did not think the conditions had yet been met for a change in policy direction.

Nevertheless, economists at Swissquote are constructive for the Euro versus the Dollar, anyway, seeing a chance of a recovery to 1.1150.

With Sterling predicted to fall, therefore, there seems to be a slight bias to more Euro upside, despite the chart support below the current 1.1580 lows.

The Pound This Week

The big event in the week ahead will be the debate in Parliament over the Brexit Bill and subsequent vote in the Commons on Wednesday, February 8.

Important amendments to the Bill will be discussed during these debates in relation to how ‘Hard’ or ‘Soft’ Brexit should be.

One proposed amendment would be to discuss whether the UK should exit the common market as well as the EU before withdrawing.

Another is, “that Parliament be regularly updated by the government on the advancement of the negotiations;” says chief economist for Italian lender Intesa San Paolo, Luca Mezzomo.

Parliament may ask for further powers, including the power to vote to approve the agreement after negotiations are complete and to extend negotiations in order to reach a better agreement.”

Then there may also be amendments to protect he right of EU citizens living in United Kingdom and the request for an assessment of the “impact of Brexit on specific sectors, such as climate change, social inequality, and public finance,” said Mezzomo.

Once the vote in the Commons is passed the House of Lords will have their turn to debate and vote on the Bill on February 20.

It is then expected to be finally invoked on March 7.

From a data perspective, the big release will be Manufacturing and Industrial Production on Friday, February 10, at 9.30.

Analysts estimate a downtick to 0.4% from 1.3% previously for Manufacturing, and Industrial Production slowing to 0.2% from 2.1% in December.

The Trade Balance, also released on Friday is expected to show a narrowing of the Deficit to -11.4bn from 12.16bn in December.

Source: PoundSterling

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