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- GBP/EUR vulnerable to weakness

- Strong floor of support in 1.1300-30 range should hold

- European summit on 17-18 main event for Sterling

Pound Sterling starts the new week lower against the single-currency on news it is unlikely a Brexit deal will be achieved at this week's European Council summit with both sides still at loggerheads on the key question of the Irish border backstop.

At the time of writing the GBP/EUR exchange rate is quoted at 1.1351 having started the week at 1.1391. "Sterling has moved lower on the news, but the market hasn't thrown its toys out of the pram yet. The adjustment lower really just resets the optimism of last week, with it likely to need some downhearted commentary from UK and European diplomats at the European Council summit this week to drive it significantly lower," says Mark Palmer at Hamilton Court FX.

During the previous week Sterling rallied only to go sharply lower towards the close as markets covered exposure to Sterling as they realised no breakthrough on Brexit talks was likely ahead of the weekend.

The resulting volatility is reflected in the formation of a bearish shooting star candlestick pattern on the weekly chart which bodes bearish for coming days.

If next week is bearish too, it will provide the shooting star with confirmation and suggest a reversal in the short-term trend and a continuation lower.

Until that happens, however, the short-term trend remains bullish and we expect it to eventually resume.

A break back above the 1.1463 highs would supply confirmation of a move back up to our longer-range target of 1.1600, close to the upper boundary of the pair's long-term rising channel.

The last two down-days, however, were quite steep and bearish, and suggest a risk that more weakness could come before the recovery.

The RSI momentum indicator on the daily chart below is also indicating a change in the short-term outlook for the pair after moving out of the overbought zone. This is a signal to sell.

We see a chance, therefore, that the pair may pull-back, if only temporarily.

Any corrections will probably hit a floor however in the tough support zone between 1.1300 and 1.1330, made up of a mixture of the 50-week moving average (MA), 200-day MA and the R1 monthly pivot. If it breaks below these levels it could signal a much deeper decline is underway.

What is more probable is that the pair will pull-back, stabilise, and then resume its uptrend and continue moving higher.

From a trading opportunity the best advice based on this forecast would be to place a buy limit order in the 1.1300-30 region with a stop below 1.1300, and graded targets at the 1.1440 R2 pivot level, the 1.1463 highs and then the 1.1600 longer-range target.

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The Pound: What to Watch

U.K. Brexit minister Dominic Raab will travel to Brussels on Monday for a meeting with E.U. chief negotiator Michel Barnier, probably to agree on the final proposals to put before E.U. leaders at their crunch summit on Wednesday, October 17-18.

The outcome of the summit is expected to be a key driver for the Pound in the week ahead. If there is concrete progress on a withdrawal deal Sterling is likely to surge higher; if, on the other hand, there is no progress the Pound will fall.

Analysts at FX broker XM are rather pessimistic about the possibility of a major breakthrough:

"As it is standard for all E.U. negotiations to last into the last minute, the remaining issues are unlikely to be resolved at the E.U. heads of government summit on October 17-18 and the talks will probably continue into November when a special summit is being planned."

XM adds that "a worst-case scenario would be for Prime Minister May to secure a deal that has little chance of getting approved by the British parliament."

Indeed, weekend headlines have been troubling for the Prime Minister with reports that the cabinet are being urged to stage a mutiny on May's plans.

The big problem lies with a backstop clause that would trigger if the E.U. and U.K. fail to reach a trade deal during the two year transition period. There is talk that the backstop could apply to the whole U.K. and not just Northern Ireland, as had been the original proposal.

It is believed that Prime Minister May is willing to allow this transition to last indefinitely; something fiercely opposed by Brexit supporting MPs in the Conservative party. Should a time limit be agreed the opposition to May might fade and she will be able to push legislation through parliament.

There are several major releases in the week ahead but probably the most important is broad inflation data in September, which is forecast to show a 2.6% rise compared to a year ago and a 0.2% rise compared to a month ago, when it is released on Wednesday at 9.30 B.S.T.

Core inflation, meanwhile, is forecast to show a 2.0% rise compared to a year ago.

Inflation informs central bank policy and, crucially for FX, whether they put up interest rates; these in turn impact on exchange rates. A higher-than-expected rise in inflation would increase pressure on the Bank of England to raise interest rates and support the Pound.

The other major release in the week ahead for the Pound is employment and wage data, out on Tuesday at 9.30.

The unemployment rate is expected to remain at 4.0% in August. Average pay excluding bonuses is expected to have climbed by 2.9%, and pay including bonuses to have increased by 2.6%.

Market participants will be particularly focused on whether pay has increased more than expected - if it has the Pound could rise - as this will raise the outlook for inflation.

The third major release for Sterling in the week ahead is retail sales out at 9.30 on Thursday.

Retail sales have been fairly resilient but in September they are forecast to show a -0.3% drop (from 0.3% in August) but, nevertheless, a 3.7% rise compared to September last year. A higher-than-expected result would probably support the Pound as it suggests greater growth, inflation, and higher interest rates which are usually favourable for a currency.

Finally the weekends with a speech by the governor of the Bank of England (BOE) Mark Carney on Friday, at 16.30, which has been earmarked by some as a possible time for the Uk authorities to announce progress on securing trade deal with the EU.

The Euro: What to Watch

The Italian government has said it intends to complete its final budget package proposal for presentation to the EU by Monday, October 15 - a full 5 days before the official deadline on the 20th.

Assuming they make good their promise the proposal will be sent forthwith to Brussels and it is then that markets could witness some volatility. If Brussels reject the amended budget proposal, the Euro could fall again amidst further uncertainty.

Ultimately the Italian executive will probably have to bend to the will of the markets as they will find higher borrowing costs unsustainable, but then again, we are living in extraordinary times.

The main hard data release for the Euro in the week ahead in inflation data which is forecast to rise 0.5% month-on-month (mom) in September, when it is released, and 2.1% compared to a year ago. This would be a rise from the 0.2% increase in August but no change year-on-year.

Possibly as important is core inflation which is expected to show a 0.9% rise in September - the same as it did in August when it faltered from the previous 1.1% level.

Further inflation declines would be extremely negative for the Euro as they would start to seriously bring into question the European Central Bank's plans to normalise monetary policy in 2019.

The inflation data is out at 10.00 B.S.T on Wednesday, October 17.

Another key release for the Euro in the week ahead is the ZEW economic sentiment survey which is considered a reliable leading indicator for both the German and Eurozone economy.

ZEW interviews 350 German institutional investors and analysts regarding their 6-month outlook for the German economy and the Eurozone. In September they are expected, on balance, to be more pessimistic about the outlook for the Eurozone, with a balance of -9.1 compared to the -7.2 previously. For Germany even more so with a -12.6 result forecast compared to -10.6 previously.

German business sentiment has been the most savagely hit by global trade tensions, according to forex broker XM.

"German business morale has been the worst hit in Europe from the US-China trade war and most German and regional sentiment barometers remain well below the peaks enjoyed in 2017, casting doubt about a rebound in Eurozone growth," say XM in a preview of events lying in the week ahead.

The Eurozone trade balance in August is out at the same time as the ZEW survey and is forecast to show a surplus of 15.1bn Euros compared to 17.6bn previously.

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Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here