Image © Pound Sterling Live

Technicals: Bias is for a continuation lower

Positive Trigger: No confidence vote never materialises

Negative Trigger: May loses a vote of no confidence

Euro eyes European Commission verdict on Italian budget

The outloook for Pound Sterling against the Euro is on balance negative over the short-term timeframe and those watching the GBP/EUR exchange rate should be positioned for further weakness but remain alert that there are a number of Brexit-related triggers that might offer the U.K. currency some respite.

Pound Sterling saw its largest single-day drop against the Euro for over two years in the previous week as Brexit uncertainty spiked, and coming days promise further volatility as markets gauge the ability of Prime Minister May and her Brexit plan to survive.

Further, news that May and her team will be in contact with Brussels suggest the room exists for the Prime Minister to seek further Brexit concessions to allow a deal to pass.

Prime minister Theresa May has presented the agreed terms of the U.K.'s exit from the European Union, but the deal has been met by a barrage of ministerial resignations, including by Dominic Raab, the Brexit minister who helped deliver the very deal. Markets were shaken by the scale of opposition to the deal which suggested a 'no deal' outcome in March 2019 had risen sharply.

"The outsized market moves reflects heightened fears of a more disorderly “No Deal” outcome and the increased likelihood of a Corbyn-led government as the Tory government risks tearing itself apart over the “true” meaning of Brexit," says Foreign exchange analyst Fritz Loew with MUFG in London.

GBP/EUR has now once again broken out of it's long term rising channel - the same channel it only recently clawed back into the week before last; this is a bearish sign for the pair.

Further bearish signs include the fact that the exchange rate has now also broken below both the 50 and 200 day moving averages (MA) which lie clustered in the lower 1.13s.

The aforesaid MA’s are now also likely to present a resistance zone in the lower 1.13s above which the exchange rate may struggle to break.

If GBP/EUR moves below the October 30 1.1187 lows, it would provide confirmation of a continuation of the downtrend to a target at 1.1118 (21 September lows) followed by a potential further fall to the 1.0991 August 28 lows.

The RSI momentum study in the lower panel has formed three consecutive tops since late August which correspond with the three rising peaks in the exchange rate.

In the case of the momentum study, however, the middle peak is the tallest and the two others either side are about the same height, suggesting the outline of a ‘head and shoulders’ top pattern on momentum. This a bearish pattern which indicates momentum may have further to decline, and if momentum is set it fall the exchange rate will probably follow.

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The Pound: What to Watch

All eyes will be on prime minister Theresa May and whether she can hold onto power.

Importantly, there is confirmation that the U.K. can get further concessions from the E.U. - this is exactly what is required to allow the DUP and Conservative party opponents back on side.

In a Sky News interview May says the key to the outlook would be the next seven days, when her negotiators would be going back to E.U. officials and hammering out the "future relationship".

She will also be visiting Brussels, she added, and will talk to E.U. Commission president Jean-Claude Juncker as part of the week's discussions.

May needs further concessions and the E.U. can quite clearly see the plan they have brokered requires some help. This news is a Pound -positive development.

Conservative rebels seeking May's ouster might this week eventually muster enough votes - 48 are needed - to force a vote of no confidence in the Prime Minister. This would be a Pound-negative development.

If May loses the vote she is out, if she survives she is immune to another challenge for a year.

"To unseat PM May successfully would require a majority and it is much less clear

that this number would be reached," says MUFG's Loew. "If PM May was surprisingly defeated in a leadership challenge, we would expect the Pound to fall by a further 3% to 5%. It would heighten concerns over a 'No Deal' outcome."

May winning a vote would be Pound-positive as it does suggest the room for manoeuvre by 'hard brexiteer' opponents is fast running out.

There were expectations that May would be subject to a no confidence vote on Friday, November 16, but the threshold has yet to be met, suggesting the rebellion might in fact be stalling. As of the time of writing there still appears to be too few letters to trigger a vote of no confidence.

If it does stall, we see it as a positive trigger for a potential, partial, recovery in the currency.

A key event in the week ahead for the Pound is probably the Bank of England Inflation Report hearings conducted by members of the House of Commons Treasury Select Committee, a parliamentary body charged with oversight of the public finances.

The comments from the Bank of England at this hearing, especially in relation to the trajectory of the economy and the effect of Brexit, could impact the Pound.

Recent economic data including CPI and retail sales were lower-than-expected, while growth data suggests a slowdown in activity into year-end.

The hearings are on Monday at 11.00 GMT.

The other key release is the CBI industrial trends survey out at 00.00 on Monday, November 19. Although unlikely to move markets on their own, CBI surveys are usually good leading indicators of future economic activity and, therefore, contribute to formulating the overall economic backdrop in which to access the Pound.

Public sector net borrowing is out on Wednesday at 10.30. Borrowing came out at -3.26bn on October. Overall government borrowing has fallen over recent years.

The Euro: What to Watch

The main factor impacting on the Euro in the week ahead will probably be news about the Italian budget and talks between Brussels and Rome. As things stand, neither side appears to be willing to stand down so consequently the issue is likely to be a source of volatility for the Euro.

The Italian government continues to insist on maintaining its original manifesto spending promises which would increase the deficit to 2.4%, arguing increased growth from the spending would offset the higher bill. The EU, as well as the International Monetary Fund, do not agree and say it would simply push up Italy's debt burden which is already the second highest in Europe.

Turbulence is particularly earmarked for Tuesday at 11.00 GMT when the E.U. Commission is scheduled to publish feedback on the the Italian government's latest revised budget proposal, although it is unlikely to differ from previous rejections very much.

A major data release for the Euro in the week ahead is Flash Services PMI for November, which is forecast to show a further reduction in activity to 53.0 from 53.1 reported in October, and is released on Thursday at 10.00.

PMIs are survey based gauges of economic activity and useful future indicators of GDP. The second PMI release in each quarter provides a highly reliable indicator of that quarter's GDP so November's data is even more significant than usual as it will be used to accurately predict Q4 Eurozone GDP.

Consumer confidence is a major release in the week ahead. Economists forecast a fall to -3 in November from -2.7 previously. Given the high impact on GDP from consumer spending, consumer confidence is an important gauge of growth.

The Eurozone current account is another major macroeconomic release in the week ahead which could impact on the single currency. It measures the country's gross balance of payments. Economic theory has it that a surplus is appreciative for a currency and a deficit depreciative. In September the surplus was 20.6bn, the consensus appears to be forecasting a rise in October.

The minutes from the meeting of the European Central Bank (ECB) are out at 14.45 on Wednesday and will reveal the governing council's thinking on the economy and future monetary policy.

The main thing analysts will be looking out for it whether the ECB is set on continuing its autopilot to reducing stimulus at the end of 2018 and increase interest rates after the summer of 2019. Recent lacklustre growth data appears to have brought into question whether the ECB will stick to its roadmap.

Any changes are likely to result in volatility for the Euro given how sensitive it is to changes in monetary policy strategy.

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Bank-beating GBP exchange rates: Get up to 5% more foreign exchange 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