The GBP to EUR exchange rate starts the new week just above a key support zone that we will be expecting to arrest the negative momentum that has built up since the start of June.
- Pound to euro rate today = 1.2772
- Euro to pound rate today = 0.7832
After trending strongly higher through May GBP/EUR suddenly performed a volte-face and fell back down to a cluster of strong support lines, which we were confident would prevent further losses.
We wrote at the close of the week gone by, a week within which sterling was seen as the worst performing currency in the G10 space, that the outlook for the GBP/EUR had shifted into negative following a break of the support lines.
The fall through the upward trending support line has been particularly negative in our opinion as sterling had relied on a surge in buying interest on each occassion it met the line since the start of April.
The one ray of hope however is the confluence of the 50 and 100 day moving averages at 1.2770 - precisely where the GBP/EUR will start the new week. This area is signified by the red and grey lines in the above chart.
Is it a coincidence that the pair's halted its weekly decline at this confluence?
Some would say not as there is strong historical evidence that traders respect these levels on the GBP/EUR in particular.
Therefore, sterling-euro could bounce higher off this support zone over coming days.
That said, with markets so heavily focussed on polling results, it would not take much to break this support and invite a decline down to the 1.26 support area that saw downside moves in the pair arrested in early May.
If the exchange rate weakens below 1.2700, however, that would lead to a more bearish forecast with a downside target at 1.2600.
The bearish MACD cross of its signal line also supports the case for more downside.
Expect Opinion Polls to Influence Market Direction
Sterling enters the new week carrying wounds from a surprise swing in favour of the leave vote was the cause of the sudden reversal, after an ICM poll for the Guardian showed the ‘Leave’ camp suddenly increasing its share to 52% ahead of ‘Stay’s’ 48%.
The British pound has had recovered through the April to May period - just when Remain was building itself a comfortable cushion in the polls. It is no surprise then that the rapid decline seen over recent days in GBP coincides with Leave regaining momentum.
As the below poll of polls shows, Remain has seen its advantage dissipate:
The pound's recent declines have coincided with a tightening of the polling results - and we would expect movement in the above graph to be key for GBP heading through the next three weeks.
"Brexit trumps all," says Kathy Lien at BK Asset Management, "the performance of the British pound has been driven entirely by Brexit polls and the same is expected in the coming week with only industrial production and the trade balance scheduled for release."
Data Points That Could Shake the GBP/EUR Over Coming Days
As far as data for the pound in the week ahead goes, the highlight will be the release of official Manufacturing Production data on Wednesday.
Given the subdued Manufacturing PMI result, which although better-than-forecast, and back into growth territory, was nevertheless still historically low, there is little expectation of a strong result.
Volatility stemming from changes in EU referendum poll results are likely to dominate trade in the UK currency in the week ahead as we near the time when voters will go to polling booths to decide the outcome of the UK referendum.
Recent polls have shown either a slight lead for the ‘Leave’ camp or the two neck-and-neck.
Friday’s Services PMI release showed a higher than expected result in May, but because it was from such a low base it failed to lift sterling, and pointed to a slowdown in growth in the second quarter.
Many respondents in the Services PMI survey highlighted uncertainty over Brexit as a major reason for the slow-down, and this may start to garner support for the Remain campaign as the economic impact of a potential win for leave starts to be hammered home.
As far as data for the pound in the week ahead goes, the highlights will probably be Manufacturing Production on Wednesday, however, given the subdued Manufacturing PMI result, which although better-than-forecast, and back into growth territory, was nevertheless still historically low, there is little expectation of a strong result.
GBP Long-Term Outlook = Bullish
Those with currency decisions spanning a few months should look through the current short-term noise and be aware that the outlook for sterling remains constructive.
"The outlook for the GBP is positive and, with sizeable short GBP positioning, we think risks are skewed to the upside. We expect the BoE to start its tightening cycle in Q2 2017," say BNP Paribas in a global forecast note.
We would read between the lines and assume that BNP are operating from a base-case scenario that sees the UK voting to remain a member of the European Union.
Analysts point out the UK’s balance of payments position is solid, with the current account deficit financed by FDI and portfolio investment inflows.
However, with taking a specific look at the GBP/EUR, BNP are also positive on the euro's prospects.
"We think EURUSD could rally to 1.16 by mid-year, despite the ECB delivering a significant set of easing measures," say BNP, "a fragile risk environment is likely to deter eurozone outflows, leaving the EUR supported by its current account surplus."
Nevertheless, the pound is forecast to end the year at 1.3888 against the euro.
Macro Brief for the Week Ahead
Next week, the focus will be on Japan’s first quarter final GDP data. It’s expected to have grown by 1.5% annualised in the first quarter. Japan’s tax hike is still a major talking point.
The hike from 8% to 10% was scheduled to take place by April 2016, but now it’s expected to happen by the end of 2019. From a trading perspective, the USDJPY dipped to 108.50 this week.
The oil market will also be interesting to watch. OPEC failed to reach an agreement this week.
Rising financial pressures bring the world’s most cost-efficient producers to raise debt to cope with the cost of extending their market share at the current market price.
It seems to be a good time to sell debt as it gives a good alternative to investors looking for returns in this low rate environment, while avoiding highly volatile stock markets.
In this context, WTI will likely see resistance pre-$50 as fundamentals haven’t changed, and the global oil glut will continue pressuring prices to the downside.
It’s possible that we see a weakening towards the $47.40, May 23rd low, if cleared this could pave the way towards $45.