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- Breakout from Wedge pattern suggests 1.1600 target

- Brexit headlines out over weekend on balance Sterling-positive

- GDP data main release for Sterling; German GDP for Euro

The Pound-to-Euro exchange rate is trading at 1.1402 in Monday afternoon trade in London, ensuring a soft start to the new week for a pair that enjoyed three successive days of gains in the week prior.

The currency has commenced the week on a softer footing following the release of a slew of disappointing UK economic data, the highlight of which being a 0.4% month-on-month contraction in UK GDP in December.

While the data sets the Pound off on a softer start to the new week, if we take a step back and look at the market we can see Sterling is still at relatively elevated levels on a multi-week basis and our technical studies suggest the currency could see further gains near-term.

From a technical standpoint, the outlook is however bullish after the pair broke out of a wedge pattern, and it is forecast to continue rising from here, potentially up to a target at the top of the range, at 1.1575-1.1600.

A break above the 1.1455 February 7 highs would supply confirmation for a continuation higher.

Despite the breakout of the wedge, it is still not clear the pair has technically reversed trend. It has only formed one higher high (HH) and higher low (HL) since breaking out and this is not yet enough to confirm a new short-term uptrend. A break above the Feb 7 highs, however, would.

Momentum is constructive on the 4hr chart and supports a bullish bias to the outlook.

Longer-term the pair has been stuck in a sideways range between 1.0950 and 1.1600 since the end of 2017. Recently it ran up and touched the range highs once again, only to back down.

A clear break above the range highs on a daily closing basis would probably be required to signal confirmation of a breakout. Such a break would be a strong signal of substantially more upside to the upper teens or even 1.20 level.

Another way of looking at the current market patterning is to see a bullish ‘flag’ price pattern. This consists of a rally higher - the ‘pole’ - and then a sideways or marginally bearish consolidation - the ‘flag’ square.

The bull flag is a bullish continuation pattern. A break above the flag highs would signal a continuation of the rally higher to a target of the same length as the pole extrapolated higher. In this case this suggests a final target at 1.1900 with an interim target at the 1.1600 range highs.

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The Pound: What to Watch this week

Brexit remains the key driver for Sterling with the currency being a function of the markets expectation for a 'deal'or 'no deal' Brexit.

Markets are currently confident a deal, of some sort, will be achieved, hence the Pound's outperformance during 2019.

Weekend news is constructive in this manner amidst news the government has sought to buy Prime Minister Theresa May more time to put together a workable Brexit deal by promising MPs another say by the end of the month, as business leaders said the process was now in the “emergency zone”.

Communities secretary James Brokenshire has said that if no finalised deal were put to the Commons by 27 February, MPs would again be given an amendable motion to consider. This would give them the chance to block a 'no deal' departure or make other interventions.

Markets will likely focus on the prospect of parliament being given another shot at blocking 'no deal', we believe this should prove supportive to Sterling.

May will make a statement to parliament on February 13 updating lawmakers on her progress so far in seeking changes to her deal. The debate on February 14 will be on a motion — a proposal put forward for debate - about Brexit more generally. However, because May is clearly engaged in negotiations with the EU, parliament is expected to give the PM more space and votes of significance will only likely be expected later in the month, in line with Brokenshire's guidance.

The main data release for Sterling is Q4 and December GDP data out at 9.30 GMT on Monday, February 11.

The data will provide investors with further hard evidence of how Brexit uncertainty, as well as the global slowdown, is affecting the UK economy.

“So far, we have seen only mixed signals from the economy, although the more up-to-date PMI data suggests businesses and individuals are delaying their purchasing plans as the Brexit debate enters crucial stage with the March 29 exit date fast approaching,” says Fawad Razaqzada, a market analyst at Forex.com.

Current market expectations are for GDP to slow to 1.4% compared to a year ago (from 1.5% in Q3) and to rise 0.2% compared to the previous month of November. A deeper slowdown might have a temporary short-term negative effect on Sterling but it could also focus minds on avoiding a hard-Brexit and, therefore, ultimately have a positive impact on the Pound, if it reduces the chances of ‘no-deal’.

“On top of this, Brexit will remain in focus as a desperate UK Prime Minister Theresa May struggles to renegotiate the withdrawal agreement with the EU leaders,” adds Razaqzada.

Also released at 9.30 on Monday morning are Manufacturing Production data, with the headline expected to show a rise by 0.2% in December, Industrial Production, which is forecast to rise 0.2% and Business Investment, which is expected to rise by 0.2% quarter-on-quarter in Q4.

Inflation data out on Wednesday at 9.30 will be of interest. Usually, it is important for the Pound but this time it may be overshadowed as Theresa May could be making another major Brexit updating speech on that day.

“UK CPI will also be released on Wednesday. Although important, in the grand scheme of things, not many people will pay much attention to it because of Brexit, as mentioned above. Anyway, headline CPI is expected to have eased to +1.9% from +2.1% previously while core CPI is expected to have remained unchanged at +1.9%,” says Forex.com’s Razaqzada.

The Euro: What to Watch this Week

Fourth quarter German growth data out on Thursday at 07.00 GMT is probably the main release for the Euro. It is forecast to show a 0.1% rise compared to the previous quarter, which itself showed a -0.2% decline.

If Q4 also shows a decline it will mean the German economy has contracted for two consecutive quarters which is the definition of a technical recession. If this is the case then it will almost certainly weigh on the Euro.

A key event for the Euro could well be the February 17 deadline for the U.S. government’s investigation into foreign car imports and whether they pose a ‘national security risk’.

If the U.S. Commerce Department decides they do, President Trump will have by May 18 to decide whether or not to impose tariffs on cars of up to 25% which would be a major blow to the European car industry, and weigh heavily on the Euro.

Another key release is Eurozone employment data out at 10.00 on Thursday. This is forecast to show a 0.2% rise in people in employment compared to Q3 which itself showed a 0.2% rise from Q2. A strong result would provide marginal support for the single currency.

News from the European Union’s Eurogroup meeting of member state’s finance ministers could very well impact sentiment at the start of the week.

The second estimate for Q2 GDP growth data could be released at 10.00 on Thursday, and is expected to show growth increasing by 0.2% compared to Q3 and 1.2% compared to the previous year.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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