- GBP/EUR technical charts show bullish signs

- ‘Golden cross’ advocates more upside on horizon

- Pound to be driven by Brexit vote; Euro by inflation data

Pound Sterling starts the new week against the Euro close to where it ended the previous week: at 1.1520, and we notice that the GBP/EUR pairing has not altered its trading range by much for four consecutive days of trading now. This is indicative of a market adopting a wait-and-see stance, which is entirely understandable considering the important votes on Brexit due later in the week.

The pair was lifted last week on expectations that any deal Theresa May presents to Parliament may in fact have more chance of winning the approval of MP’s than was previously thought, and she was seriously considering asking for more time from the European Union to pass the necessary legislation to ensure a managed Brexit, therefore, diminishing fears of a cliff-edge Brexit on March 29.

From a technical viewpoint, the pair still remains trapped in a long-term range and, therefore, extremely difficult to forecast, however, in contrast to last week, this week the balance of evidence biases the outlook to being more bullish than bearish.

GBP/EUR formed a bullish hammer candlestick (circled) in the week before last, it then followed this up with a bullish green candlestick in the previous week. This second bullish candle enhances the bullish signal from the original hammer and increases the probability of a continuation higher, at least, in the short-term.

The daily chart shows market activity in more detail, and it reveals another bullish sign, which is that the pair has formed a bull flag pattern since the February 14 lows established at 1.1314.

The first part of the bull flag pattern consists of the rally up from the February 14 lows in what analysts call the ‘pole’. The second part is the gentle pull-back which began after the 1.1530 peak and is called the ‘flag’. The whole move is a potent bullish continuation pattern. A break above the flag’s highs at 1.1538 could provide confirmation of more upside to a target between 1.1600-80.

The first target is at the top of the range and is the more easily achieved. To meet the target at 1.1680 the exchange rate would have to break above the range highs, which would be a very bullish sign and unleash much higher targets in itself. All in all the general picture is looking increasingly bullish for the pair.

A further technical sign supporting the possibility of more upside is the crossing of the 50-day moving average (MA) above the 200-day MA (circled). The cross is no ordinary cross either, but a rare ‘golden cross’ which is an even stronger indicator of rising market than a normal cross.

The gentle angle of the crossover is another sign increasing the probability that the market will rise. Our research has found that when MA’s cross at a gentle angle to each other rather than a sharp ‘right-angle’ they provide a more reliable bullish forecasting signal.

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The Pound: What to Watch this Week

Brexit focus returns to Westminster this week with the Prime Minister due to make a statement in Parliament on Tuesday and an amendable motion on Brexit is up for debate on Wednesday.

The amendment to look out for is the Cooper/Letwin amendment which if passed (and a linked Bill adopted), would result in the government being directed to request an extension to the Article 50 process, should it not get a deal through Parliament by 13 March.

For Sterling the passing of such a bill makes a 'no deal' Brexit less likely on March 29, and therefore its successful passage would be seen as a positive for the currency.

However, recall a similar amendment proposed by Cooper in January failed; therefore parliamentarians might still be erring on the side of allowing May the freedom to strike concessions from the EU before voting for such an amendment.

Last week Chancellor of the Exchequer Philip Hammond said there was the chance the second, and final, Meaningful Vote on the deal itself might actually take place this week; for this to happen some kind of concessions will need to have been secured from Brussels. Indeed, it looks like these concessions won't be forthcoming in time for a vote this week and May has told journalists during a flight to a summit in Egypt on Sunday that she intends to hold a Meaningful Vote on the deal by March 12, just 17 days before Brexit.

“If the prime minister, Theresa May, manages to secure legal assurances from the EU on the Irish backstop, there will likely be a meaningful vote on the revised deal. But if UK-EU negotiations have not been completed by then, MPs could simply vote on an amendable motion on how to proceed next with Brexit. The latter carries the risk of Parliament voting to take control of the Brexit process, possibly forcing the government to extend Article 50, if Mrs. May has nothing to show from the latest round of talks with Brussels. Either way, the pound appears to be headed for more volatility.” Says Raffi Boyadjian, a currency analyst at XM.com.

Another key release for the UK currency, is the IHS Markit Manufacturing PMI for February, which is a survey-based activity indicator. This is out at 10.30 GMT on Friday and is forecast to show a drop to 52.0 from 52.8 in the previous month of January. PMI's are important leading indicators for the economy.

The Gfk Consumer Confidence survey is out at 1.01 early on Thursday morning and is forecast to show a -15 result from -14 previously - mainly as the mood sours over Brexit. An even sharper-than-predicted fall in the Gfk could well have negative repercussions for Sterling since declines in sentiment indicators often precede falls in the real economy.

The Euro: What to Watch

The main release for the Euro in the coming week is flash inflation data for February, out on Friday at 11.00 GMT. Inflation is expected to show a 1.5% rise from 1.4% please. Core inflation is forecast to show a 1.1% rise, the same as the previous month of January.

Inflation is important because it informs central bank policy which is a major driver of currency appreciation. When central banks raise interest rates it drives up the local currency by attracting and keeping greater inflows of foreign capital.

Whilst the European Central Bank (ECB) is not forecast to raise interest rates anytime soon, it has said it is considering raising them after the summer, yet if inflation and growth remain subdued, they may change their mind and delay raising interest rates. Such a delay would lead to a decline in the Euro as expectations are recalibrated.

"We have seen commentary from key ECB policymakers over recent days that suggest that the central bank is increasingly recognising the slowdown in economic growth and is prepared to adjust policy in response," says Nick Kounis, an economist with ABN AMRO. "The implications of weaker growth for the inflation outlook would be a key part of the discussion at the next Governing Council meeting."

A disappointing, below-expectation reading would likely be negative for the Euro exchange rate complex as markets would expect the ECB to engage a cautious stance; a beat could help the currency as it could suggest to markets that perhaps the economy is turning around following a particularly fallow period of performance.

"We think interest rates will ultimately be on hold until December 2020. The dovish shift by the ECB will lead to a further leg down in Bund yields, a flattening of curves and weigh on the Euro," says Kounis.

The latest unemployment rate data is out at the same time as inflation and is forecast to remain unchanged at 7.9%. Unemployment has been a bright spot for the Euro due to a consistent steady decline - a lower reading in January would further support the single currency.

Another key release for the Euro is business confidence data at 11.00 on Wednesday. It is forecast to show a drop from 0.69 to 0.63 in February. Flash PMIs in February provided a “glimmer of hope” for the Eurozone so analysts may watch PMI data more keenly than usual to see if it backs up a brighter outlook.

“The flash reading for Eurozone PMIs provided some glimmer of hope that the severe slowdown might be coming to a halt,” says Raffi Boyadjian, currency analyst at broker XM.com, “There could be more evidence of the downtrend bottoming out in Wednesday's economic sentiment indicator for the Eurozone.”

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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