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- GBP/EUR could really tumble if key support level breaks

- Testing a break below notable trendline

- Expect critical week for Brexit negotiations to boost volatility

- Euro by German data

The Pound-to-Euro exchange rate is trading at around 1.1230 at the start of the new week, virtually unchanged from the week before. While studies of the charts indicate a risk of near-term weakness, we note a critical week for Brexit negotiations lies ahead and this could inject heightened two-way volatility into Sterling.

The 4 hour chart - used to determine the short-term outlook, which means the coming week - shows how peaks and troughs have gone from rising to falling.

As the above shows, the pair has now also reached a major trendline and made several attempts to pierce it.

If it is successful breaks below it that will increase the bearishness of the outlook.

A break below the 1.1189 low would confirm a break of the trendline and open the 'sluice gates' to more downside, to a target at 1.1080.

The daily chart shows how GBP/EUR has pulled back to the trendline drawn from the August lows.

This may mark a turning point for the pair - if it goes lower and breaks below the 1.1189 lows it will confirm a break of the trendline and the onset of a more bearish phase down to a target at 1.1080.

Yet equally it could use the trendline as the base for a recovery.

An initial move up to the 200-day moving average (MA) at 1.1328 is possible. But for confirmation of a bullish extension even higher we would ideally like to see a clear break above the 1.1381 September highs.

Such a move would likely lead to a continuation up to a target at 1.1500.

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

The weekly chart shows how the pair has pulled back after touching the 50-week MA (red line).

It may be the start of a correction of the steep up move.

Downside is not yet steep enough to signal a reversal of the trend.

A correction could pull back down to perhaps the 1.10s before reversing, resuming its uptrend, and rising up to the 1.1600 highs at the multi-year range highs.

The weekly chart is used to analyse the long-term trend, defined as the next several months of market action.

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The Pound: What to Watch

Brexit news will continue to dominate the Pound in the week ahead, whilst on the hard data front industrial and manufacturing production are the main releases along with the second estimate of Q2 GDP.

From a Brexit standpoint, the main focus will be on whether the UK and EU can strike a deal or at least a semblance of a deal - if they can the Pound could rise strongly. Dominic Cummings, a leading force behind the UK's Brexit strategy, has reportedly told aides that if the EU do not strike a compromise and agree to a new plan this week then the UK will be leaving without a deal.

The stakes are certainly high, particularly as there is very little insight into how Prime Minister Boris Johnson intends to exit the EU without a deal on October 31.

According to government papers submitted to a Scottish court on Friday, Johnson will send a letter to the European Union asking for a Brexit delay if no divorce deal has been agreed by October 19. This means the Government intends to abide by the Benn Act which forces the Prime Minister to seek a Brexit extension if a deal has not been passed by parliament on October 19.

However, the British Pound actually went lower on the day as Government sources maintained that while they intend to follow the law, they will still not seek a delay. Steve Baker, the Conservative MP who heads up the party's Eurosceptic European Research Group responded to the government's court papers saying: "a source confirms all this means is that Government will obey the law. It does not mean we will extend. It does not mean we will stay in the EU beyond Oct 31. We will leave."

The UK recently submitted an alternative proposal to solve the problem of the Irish 'backstop' but the initial reaction of leading EU Brexit negotiators and stakeholders was not very positive and suggests the two sides were a long way from meeting in the middle.

Leo Varadkar, the prime minister of Ireland, said the UK’s present proposals “do not form the basis for deeper negotiations.”

The EU's chief Brexit negotiator Michel Barnier said, “there’s improvement...we are not there yet,” but privately was concerned about the proposal’s custom’s checks on the island of Ireland, a red-line for the EU.

Guy Verhofstadt, who heads up the EU Parliament's Brexit oversight committee commented that the proposals were “not positive in that we don’t think really there are the safeguards that Ireland needs.”

The proposal was however well-received by the government’s own party, however, including leading Brexiteers on the one hand and rebel Tory independents on the other. We noted that there is a decent chance the Government could win a majority were they to present a deal based on their latest plans, and this is an all-out positive development for Sterling.

A deal still looks to be some way off however as the further the government moves to meet the demands of the EU, who basically want a customs union in Ireland, the more it will alienate the ERG and DUP, without whose support it has no chance of getting the deal approved by Parliament.

This may overall lead to further pressure on the Pound in the week ahead.

Turning to the economic data, investors will be closely watching industrial and manufacturing data, which are both expected to show a -0.1% result in August from 0.1% and 0.3% respectively in July, when released on Thursday and 9.30 BST.

A combination of Brexit uncertainty and the global manufacturing slowdown have started to show up in British economic data and the recent Services PMI report said there was a heightened chance of a technical recession happening in the UK.

If the results show a deeper-than-expected contraction in the data the Pound will probably weaken.

Q2 GDP is expected to remain unrevised for its second estimate, with the quarterly reading to continue to show 0.0% growth, yearly 1.3% and monthly 0.3%.

If results are revised down the Pound will follow suit.

The Euro: What to Watch

German data - factory orders and industrial production - are the main data releases for the Euro whilst an overarching risk factor are threats of the U.S. widening tariffs on European imports.

The German economy continues to struggle and there will be several important data releases in the week ahead which could either intensify or ease concerns about the welfare of Europe’s largest economy.

Factor orders in August are forecast to fall 0.3% from 2.7% in the previous month, when data is released on Monday at 9.30 BST.

German industrial production is expected to show a 0.3% fall in August when data is released at 7.00 on Tuesday. In the previous month it declined 0.6%.

Another key release is German inflation in September which is forecast to show a 0.2% decline when released at 7.00 on Friday.

If any of these prints come out lower-than-expected they will potentially weigh on the Euro - if higher they may offer support.

The Eurogroup meeting of Eurozone finance ministers starts on Thursday. This has the potential to support the Euro since a current hot topic that may gain exposure is the possibility of more fiscal stimulus in Europe to drive up growth.

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

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