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- GBP/EUR will probably extend uptrend

- Break above the July 25 highs would be key

- Pound to be driven by Brexit news; Euro by ECB meeting

Pound Sterling recorded a fourth successive weekly advance against the Euro last week, a run that gives a strong hint that near-term momentum lies with the UK currency. The improvement in Sterling's performance rests largely with the view Parliament has succeeded in delaying the Brexit deadline once more, and that a key European Central Bank event due this week could prove negative for the Euro.

The GBP/EUR exchange rate is trading at 1.1130 at the start of the new week following last week's 0.71% advance, and our technical studies of the charts suggest the trend higher will probably continue.

The 4 hour chart - used to determine the short-term outlook, which means the coming week or next 5 days - shows how the pair has risen pretty steadily from the August 11 lows. Recently it formed a box pattern which it broke out of the top of - as expected - in line with the prior uptrend.

Now the pair will probably continue rising up to the next target at 1.1200-05.

A break above the July 25 high at 1.1255 would be crucial for signalling a continuation higher.

The July 25 high was the last lower-high during the previous downtrend so a break above it would represent the hitting of an important bullish milestone.

Such a break would probably lead to a move up to a target at 1.1310, at the 200-day moving average (MA), which is likely to present a formidable resistance level to further gains.

The daily chart shows how the pair may be forming a ‘measured move’ pattern higher.

Measured moves are three wave price patterns in which the first and third waves are often of equal length or at a minimum related in length by a Fibonacci ratio of 0.618.

According to this reading, the pair is likely to rise to a target at at least 1.1205, which is the 0.618 Fibonacci ratio of the first wave (labeled A-B).

The Fibonacci ratio, which was discovered by the Italian Mathematician Leonardo Fibonacci in the 12th century, explains proportionately in natural and some man-made forms and financial markets.

A break above the 1.1255 July 25 highs would confirm a continuation higher to a target at around 1.1310 where major resistance kicks in from the 200-day MA, since major MAs are often sources of resistance to trending prices. After that, the pair will probably pull-back and consolidate for a while.

The daily chart is used to analyse the medium-term trend, which is the next week to month of price action.

The weekly chart - used to analyse the long-term trend, defined as the next several months of market action - shows the pair having broken properly back inside its long-term range, which is a bullish sign, suggestive of more upside.

As already shown on the shorter time-frame charts, the pair will probably rise further to a target at 1.1310, and then possibly even higher eventually.

Another bullish sign is that the RSI momentum indicator is at a relatively high level compared to the past. When it was last its current level the exchange rate was much higher in the 1.15s and this is a further bullish sign.

The pair may well revisit the range highs again. A break above 1.1340 -50, for example, would confirm a continuation higher to the next upside target at 1.1500.

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The Pound: What to Watch

Brexit is expected to continue to overshadow economic data as the main factor driving the Pound in the week ahead.

Boris Johnson will probably seek another vote of approval from Parliament for an early general election but he needs two-thirds of the vote to be successful and it seems highly unlikely he will get it.

If Johnson fails to secure an election before October 31 then we would suggest the chances of a 'no deal' Brexit in 2019 will have been materially reduced, and this development will surely provide support for Sterling.

What is certain, that while Brexit will have been delayed by recent developments, a 2019 General Election is almost a certainty, and it is here where market focus will fall.

Expect markets to try and weigh up the implications of the various outcomes: what would a Conservative majority mean, what would a Labour majority mean? What would the messy 'in-betweens' i.e. coalition and confidence-and-supply governments mean?

The range of potential outcomes are large in this time of Brexit, and therefore we would expect the uncertainty posed by the vote to keep a lid on Sterling and limit its full recovery potential.

On the data front, UK monthly GDP for July, industrial production, and employment data are the highlights.

GDP is expected to show a 0.0% rise in July like it did in June when it is released at 9.30 BST on Monday.

GDP showed a contraction of -0.2% in the second quarter of the year. Data out next week will show the 3-month rolling rate of GDP to July, which is expected to be -0.1%.

If the negative trend continues all through the 3rd quarter, i.e. in August and September, the country will have met the criteria for qualifying for being in a technical recession - two consecutive quarters of negative growth.

Although the Pound may decline if GDP comes out lower-than-expected next week loses may be short-lived if the Brexit news is positive for Sterling, as is widely expected.

“An overall expected downbeat set of data will not be able to stop the pound from bursting higher if Prime Minister Boris Johnson fails again in his bid to call a snap election,” says Raffi Boyadijian, an investment analyst at forex broker XM.com.

Employment data is expected to be broadly positive and show a continued rise in wages of 3.7%, an employment rate of 3.9%, and an increase in jobs of 43k in July, when the data is released at 9.30 on Tuesday.

Industrial and manufacturing production are forecast to show a -0.1% decline in growth in July when figures are released on Monday at 9.30.

The Euro: What to Watch

The main event for the Euro in the week ahead is the European Central Bank (ECB) policy meeting on Thursday, at 12.45 BST.

The ECB is widely expected to ease policy at the meeting in order to help support the ailing Eurozone economy.

A loosening of monetary policy is generally negative for the Euro as it involves either an increase in liquidity - in the case of QE - which dilutes the currency, or a lowering of interest rates, which lowers net foreign capital inflows.

The main debate amongst investors appears to be about whether the ECB will revive its QE programme and whether they will cut interest rates further.

There has been much talk of a 'shock and awe' police response to the Eurozone's recent economic slowdown: the larger the stimulus, the more likely it will boost growth and raise inflation.

“The European Central Bank communicated its intention to take decisive policy action in September well in advance of Thursday’s meeting, fuelling speculation that it is about to unleash another ‘bazooka’ of monetary stimulus," says Raffi Boyadijian, an investment analyst at broker XM.com.

By this measure, the greater the stimulus, the more likely a decline in the Euro.

Analysts at investment bank Wells Fargo expect an aggressive policy move and the ECB to launch a 45bn QE programme, with a -0.1% cut to both the refinancing and the deposit rate.

“Our expectation is that the ECB will cut rates 10 bps and restart its QE program. Specifically, we expect the ECB to buy €45 billion a month in sovereign bonds for the next 12 months. Recent pushback against restarting QE from some ECB officials, however, makes the second portion of this forecast more uncertain than the first,” says Wells Fargo.

However, there is also a chance the ECB will underwhelms, a scenario that would aid Euro gains.

A number of ECB Governing Council members have expressed scepticism this would be a good idea and the GC appears split over the matter.

If QE - also known as the Asset Purchase Programme - is not expanded it might actually lift the Euro marginally as the general expectation is that they will press the button and begin between 15-45bn Euros of asset purchases a month.

If the ECB opts to restart QE they will also almost certainly cut interest rates.

QE tends to depress long-term rates which leads to a flatter yield curve, and that is bad for banks. In order to avoid negative side effects, the ECB will also need to cut short-term rates by cutting its refinancing or lending rate and deposit rate too. These currently stand at 0.0% and -0.4% respectively.

The most benign option would be to do nothing or only cut the deposit rate by -0.1% to -0.5%.

A cut in the deposit rate is probably already priced in by markets.

If the ECB does nothing the Euro will probably make a strong recovery. Much depends on the language of the statement and whether it hints at the likelihood of further cuts or not.

"There’s a risk markets may have gotten ahead of themselves as remarks by ECB officials in recent days have cast doubt on the likelihood of a fresh round of asset purchases,” says Boyadijian. “Should the Bank deliver only a rate cut (a 10-basis points reduction in the deposit rate is almost certain), the decision could be met with disappointment, triggering a sell-off in European stocks while boosting the Euro."

Boyadijian adds that if the ECB’s announcement falls short of expectations, its forward guidance will be just as important, and the market fallout could be minimised if policymakers leave the door open for quantitative easing in the future.

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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