Image © Pound Sterling Live

- GBP/EUR showing signs of a rebound

- But insufficient confirmation from price action as of yet

- Weekend comments from France's Macron to generate interest

The short-term technical outlook for the Pound-to-Euro exchange rate is improving, and our technical forecasts for potential short-term gains playing out on Monday, February 18 appear to be playing out with the pair nudging higher above 1.14.

At the time of writing GBP/EUR is quoted at 1.1420, having closed the previous week at 1.1409 ensuring a short-term recovery from the February lows at 1.1313 extends.

From a technical viewpoint, we note the pair remains trapped in its long-term side-ways orientated range and, therefore, extremely difficult to forecast.

But, we wrote ahead of the market open that Pound Sterling is showing some yound bullish signs in the short-term, however we acknowledge that predicting any price action beyond the next few days with any confidence is difficult.

GBP/EUR has formed a bullish hammer candlestick (circled) and is trading above the 50-week moving average (MA) - a bullish sign - but the actual exchange has still not started going up with any confidence as of yet.

The daily chart shows the current market activity in more detail: the pair has been falling since touching the range highs on January 24 and has established a short-term downtrend within the confines of the range.

But, the downtrend has lost momentum recently and its continuation lower is in doubt for the next couple of days. The two-bar pattern which formed on February 14 and 15 (circled) is another sign the short-term downtrend may be reversing and if it is followed by a bullish day on Monday it will enhance the upside signal.

The abundance of early bullish signs, though still not confirmatory, suggests nevertheless upside risks and the possibility of a breakout higher, and a move above the 1.1455 February 7 highs would probably confirm such an extension, to, perhaps, an upside target at 1.1600 at the top of the long-term range.

There is a cluster of MAs, including the 50-day and 200-day, all just underneath current price action in the 1.12s which are likely to obstruct further downside; this increases the chances of a reversal higher.

If the Pound eventially succumbs to further losses against the Euro we will be watching support at the cluster of MAs in the 1.12s which are a major impediment to bearish progress and would have to be cleared before hazarding a forecast for a continuation lower. A break below 1.1230 on a closing basis, would probably do the trick and provide sufficient confirmation to support the expectation of further downside, to a target at 1.1100.

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The Pound: What to Watch this Week

Image © Number 10 Downing Street

Brexit developments will likely be the primary driver for the Pound this week.

News out this weekend caught our eye: reports suggest French President Emmanuel Macron "and other European countries are ready to give Britain legally binding assurances that the Irish backstop is temporary".

"President Macron of France has softened his line in recent weeks to aid a last-ditch attempt by the EU to help get the withdrawal agreement across the line next month," says Bruno Waterfield, Brussels Editor at The Times.

"Macron to the Pound’s rescue," says Viraj Patel, foreign exchange strategist with Arkera. "We’re in the pessimistic-neutral state, so news like this will on the margin lift Sterling."

UK Prime Minister Theresa May is currently engaged in negotiations with the EU to win changes to the Irish backstop mechanism: that piece of the Brexit Withdrawal Agreement that could ultimately see the UK locked into the EU's single market and customs if ever triggered.

Legislators in the UK parliament in January rejected the Brexit deal and asked the Prime Minister to deliver substantial changes to the Irish backstop if they were to pass the deal.

For Sterling, the passing of a deal is seen as a best-case scenario as it eliminates a 'no deal' will simultaneously provides at least two years of legislative stability for UK and EU businesses.

Negotiations between the EU and UK are likely to continue this week with Prime Minister May due to meet European Commission President Jean-Claude Juncker over coming days.

Looking at the data calendar, the key release for the Pound will probably be employment and wage data out on Tuesday at 9.30 GMT.

The figures come out against a backdrop of falling inflation and broadly waning growth which have brought into question expectations that the Bank of England (BOE) will start raising interest rates as soon as the fog of uncertainty around Brexit has cleared.

“After the worrying GDP numbers for December, a weak set of jobs figures could spark more concerns that the never-ending Brexit saga is starting to have a more profound impact on the UK economy,” says Raffi Boyadijian, currency analyst at broker XM.com.

The unemployment rate remains at historic lows so the key market focus will shift to average weekly earnings in December. If these have increased to 3.5% year-on-year, as forecast, it could push up the Pound. Higher earnings would probably push up interest rate expectations and higher interest rates tend to have a supportive effect on the currency because they attract greater inflows of foreign capital.

“The jobless rate is predicted to have held at 4.0% in the three months to December, while average weekly earnings are forecast to have increased by 3.5 y/y during the same period, accelerating slightly from the prior 3.4%. Faster wage growth could be seen as offsetting some of the negative effects of lower oil prices on the consumer price index, which fell to 1.8% y/y in January,” says Boyadijian.

Another key data releases is the CBI Industrial Trends survey, which can provide a leading indicator for the economy. It is forecast to show a fall to -5 in February from -1 previously.

Public Sector Net Borrowing for the UK in January is out on Thursday at 9.30, and is followed by a speech from BOE’s chief economist Andy Haldane.

The CBI Distributive Trades survey in February is out at 11.00 on Thursday.

The Euro: What to Watch this Week

Image © Adobe Images

The first main release for the Euro in the coming week is the ZEW sentiment survey on Tuesday at 10.00 GMT. The expectation is for a slight recovery in sentiment from -15 previously to -13.5 in February.

The ZEW is seen as a fairly reliable forward indicator for the wider German and Eurozone economies so a better-than-expected result could lift the single currency.

“There could be some signs that growth is steadying after months of deceleration. Germany’s ZEW sentiment survey will be the first key indicator out of Europe on Tuesday. The ZEW economic sentiment index is expected to improve marginally from -15 to -14.0 in February,” says Boyadijian.

Another important survey and leading indicator for the economy is the IHS Markit PMI survey indicator, which is out on Thursday at 9.30, and could also impact the Euro. The composite of both the manufacturing and services PMIs is forecast to fall to 50.8 from 51.0 in February.

“The manufacturing PMI is forecast to ease further to 50.3 in February, but the services PMI is anticipated to improve from 51.2 to 51.4,” says Boyadijian. If he is right the good news could stabilise the Euro.

Finally, also out on Thursday are the minutes from the European Central Bank’s (ECB) last policy meeting, and this could also be significant for the currency.

The ECB has increasingly acknowledged the weakening economic backdrop in the region in their remarks in recent weeks. However, at the last meeting, ECB head, Mario Draghi, dismissed these concerns and they had not translated into a change in ECB policy. There was no change in the guidance on interest rates as well as that a new round of TLTRO programme, as some had expected.

It could be interpreted as a dovish signal for the Euro should any evidence in the minutes show Council members discussed the issue of weakening growth to a greater degree than what Draghi let on in his press conference.

Such a sign would be expected to weigh on the Euro.

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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