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- GBP/EUR in an established downtrend, set to extend

- Momentum now oversold but not enough to signal reversal

- Pound to be impacted by Conservative leadership race

- Euro eyes Eurogroup commentary

The Pound-to-Euro rate is trading at around 1.1230 at the start of the new week, about half a percent lower than the previous week’s close. Studies of the charts suggest the exchange rate is set to continue its downtrend in the days ahead.

The 4-hour chart - which we use to ascertain the short-term outlook - shows the pair in a steep downtrend which, given the old adage that “the trend is your friend”, is expected to continue falling to a target at 1.1125 in the short-term. We use the 4 hour chart for the short-term outlook which includes the coming week.

Although the pair’s downtrend has slowed over recent days and the RSI momentum indicator is showing mild signs of convergence it remains firmly in a downtrend and this trumps all other considerations.

‘Convergence’ happens when price makes a new low but momentum doesn’t follow suit. It is a sign of waning bearish enthusiasm and can be a precursor for a rebound. Traders are advised to be cautious in pursuing the downtrend, and a continuation is only subject to confirmation from a break below 1.1225.

The 1.1125 downside target is at the level of monthly pivot a medium-strength support level which is likely to provide a floor for prices.

The daily chart tells a similar story - the pair is in an established downtrend which is likely to extend to a target at 1.1045 over the next 1-4 weeks.

The difference with the daily chart, however, is that the RSI momentum indicator is in the oversold zone, which is below 30, and this means the downtrend could be at risk of stalling or rebounding. It is highly likely that although it will go lower its downtrend will now be broken up by periods of sideways consolidation.

Nevertheless, we still see it as likely to continue down to an initial target at 1.1125 first, and then after some range trading eventually a second target at 1.1045.

We use the daily chart to give us an indication of the medium-term outlook which includes the next week to a month ahead.

The weekly chart shows how the pair has fallen for five straight weeks in a row. It also shows the longer-term sideways trend stretching back over years.

In the long-term, the pair will probably touch down at the 1.0990 range lows before bouncing and continuing to unfold within the parameters of its sideways trend.

We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.

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The Pound: Politics and Labour Market Data

Brexit politics are still likely to have the greatest impact on Sterling, with UK monthly GDP, unemployment and trade balance as the main hard data releases.

The next step in the conservative leadership contest will unfold on Monday, June 10, when candidates must declare at least eight nominations from fellow Conservative MPs in order to stay in the race. This will probably result in many of the weaker candidates being knocked out.

After that all candidates will need the votes of 17 Conservative MPs to stay in the first round ballot and at least 33 – or 10% of Tory MPs – to stay in the second round of voting.

At the moment, the leading contenders are Johnson, Gove, and Hunt, but if that changes - which is unlikely - and one of the big names gets knocked out it could impact on Sterling.

Johnson appears to be in favour of endorsing a ‘leave at all costs’ Brexit on October 31.

Michael Gove has a softer stance, aiming for a Canada-style free trade agreement and a possible further delay if necessary, which has infuriated the right of the party.

Jeremy Hunt has suggested he might be against leaving without a deal, although would so “with a heavy heart”.

The main data release is April GDP which is forecast to show a -0.1% fall compared to the previous month and a 1.7% rise compared to a year ago, when it is released at 9.30 BST on Monday, June 10. Any unexpected fall in GDP will probably weaken the Pound.

Unemployment data is expected to show the unemployment rate remain at 3.8% in April, when it is released at 9.30, on Tuesday, June 11.

Also important is average earnings which are forecast to rise by 3.1% (excluding bonus) and 3.0% (including bonus). If earnings are lower-than-expected, it will probably lead to a sell-off in Sterling.

The trade balance is expected to show a narrower -£12.96 deficit when it is released on Monday at 9.30. Generally, this is considered a positive background factor for the Pound.

Industrial and manufacturing production are expected to show a -0.7% and -1.0% decline in April when data is released on Monday, also at 9.30.

Since these are indicative of GDP growth they can also have an impact on the Pound, weakening it if they undershoot expectations and vice versa if they overshoot.

The Euro: Brussels Politics in Focus

The Euro has been strengthening of late with gains against the U.S. Dollar suggesting the single-currency is entering a broader uptrend.

The dynamics of the EUR/USD will be important for other EUR pairs, so we will keep an eye on this headline exchange rate.

Potentially important are speeches from ECB president Mario Draghi and De Guindos, although given the proximity to last week's ECB meeting, neither are likely to err much from the official stance, so their comments will probably not impact on the currency.

The speeches are due on Wednesday, starting at 09:15 B.S.T.

The Euro rallied in the wake of the ECB meeting as markets appear to have been expecting the ECB to strike a decidedly more subdued tone, and perhaps even expecting the ECB to lay the groundwork for yet further cuts to the interest rate.

It could be that Draghi expands on the stance communicated last week.

We will also be keeping an eye on the meeting of Eurogroup finance ministers in Brussels on Thursday, June 13.

The meeting of the Eurogroup of the EU’s finance ministers could result in comments pertaining to monetary policy, the outlook for the economy or deeper economic integration - current hot topics to which the currency is sensitive - which could all impact the currency.

Also of importance will be any discussion over Italy's desire to bust Eurozone rules on taxing and spending.

The current Italian government wants to breach budget deficit rules to boost their economy, a move that will invite sanctions.

The showdown between Italy and the EU is a widely seen as a concern for the future functionining of the common currency area. For now the issue appears to be in hand, but should the situation lead to a 'crisis' we could well expect the Euro to come under pressure.

This is an issue to keep an eye on over coming weeks and months.

According to the meeting's official agenda, the key subjects under discussion will include the following:

Growth, jobs and inequality in the Eurozone.The IMF’s review of the region.The EU commission spring forecast.Post-programme surveillance in Cyprus.Greece: an enhanced surveillance report.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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