Pound Sterling is seen turning softer against the Euro ahead of the month-end trading session having relinquished gains made at the start of the week.

Recall, we wrote ahead of this week's market opening that the British Pound was looking oversold and due a a short-term rebound, particularly against the Euro.

The GBP/EUR exchange rate rose to a high of 1.1554 before fading gains to edge to 1.1492 at the time of writing.

The immediate outlook is still however up for debate at this stage - will it last a mere couple of days or will the relief take us into the new month?

Fresh studies suggest that the recovery might just be a little more sustainable than we previously envisaged.

Chart-watchers have pointed out that GBP/EUR has reached a critical ‘make-or-break’ level on price charts.

The pair’s strong rise to 1.1500 on Monday has meant that it has reached the trendline guiding the longer-term downtrend.

If it manages to break above this trendline it will lead to a strong move higher, probably all the way up to 1.1600.

At the time of writing the exchange rate is hovering around 1.15 confirming a good amount of indecision in the market at the current time.

On the other hand there is also a possibility the trendline could attract sellers who expect the exchange rate to go lower.

This would lead to a move back down in the exchange rate towards the 1.1430 lows, and perhaps even lower.

Given the broader downtrend there is a good chance this could happen but there is also strong bullish evidence from the convergence between flagging MACD, which is falling to make lower lows in the bottom pane of the chart.

This shows the recent lows have been made unaccompanied by much momentum or selling pressure, which could indicate they lack underlying bearish potential and are vulnerable to reversal higher.

The fact the convergence between failing MACD and price has occurred three times in a row is another reason to question the downtrend and expect a potential reversal developing.

So this really is a "cross-roads moment" for the exchange rate.

Others agree.

"Currently the market is arguably still pivoting 1.1650 or so in broad terms and provided the key secondary support level at 1.1250 is undisturbed another such rebound might yet develop," says Lucy Lillicrap, a technical analyst with Associated Foreign Exchange.

Note that Lillicrap is viewing the pair in a longer-term timeframe hence she has a pivot placed higher than our analysis which is viewing the currency through a two-three day timeframe.

Much of the Pound’s evolution will however rest with politics so we will be interested to see whether the current trend of a strengthening in Labour’s position in the polls extends.

With political risks elevated, analysts continue to retain a negative bias on Sterling for the next few weeks.

“GBP buying interest rose marginally last week, regardless of spot hitting multi-week lows. As such it seems that speculative oriented investors have continued to buy the dip. With positioning now more balanced, we believe currency downside risks remain, especially as political uncertainty is high still,” says Manuel Oliveri, an analyst at Crédit Agricole CIB:

Consumer Confidence Could be the Real Reason why Theresa May is Slipping in the Polls

Even though many in the square mile may have been away from their desks the currency markets - unlike other assets - rarely sleep.

Currency dealers all over the world were still trading Pounds for Euros and during the day the Pound steadily gained from its Friday lows of 1.1430 to just shy of 1.1500.

The recovery was probably due to the Conservatives once again stretching their lead over labour.

This was an increase from the shock 5 point lead in the YouGov poll which had rattled markets on Friday, and increased the strong sell-off in GBP/EUR at the time.

A large lead will give Theresa May a bigger parliamentary majority and enable her to achieve a less economically damaging Brexit according to pundits – although some analyst are now sceptical of her securing anything less than a hard-Brexit due to the opposite negotiating extremes of the EU and UK.

The relationship between election polls and the Pound is extremely close according to advisory service Capital Economics who have charted their relationship below.

Capital Economics also note the strong correlation between Consumer Confidence and the government’s lead.

The chart showing the two mapped together is above and shows how they move in tandem with each other.

Analyst Jonathan Loynes at Capital Economics points out how the sudden fall in Consumer Confidence several weeks ago ‘foretold’ last week’s sudden narrowing of the conservative lead as for a while the two were out of sync and it needed the drop in support for the government to bring them back into sync again.

As far as the next few days are concerned economists see sentiment indicators probably improving in Europe when they are released on Tuesday but Eurozone inflation falling on Wednesday.

They see Euro-area unemployment, however, falling.

All in all, the depressed inflation rate is likely to offset any gains to the Euro from the higher sentiment and lower unemployment prints.

Draghi Dents Euro

The Euro was broadly steady but below recent six-month peaks against the greenback.

The Euro descended at the start of the new week across the board, hitting a May 19 low against the Dollar, after ECB chief Mario Draghi on Monday sketched a steady outlook for monetary policy and political worries related to Italy, home to the bloc’s No. 3 economy, returned to the surface.

Reports indicated that Italian voters could head to the polls as soon as this summer.

Politics remain a hot button issue for currencies, contributing to recent falls in the U.S. and U.K. currencies.

Sterling Finds Footing after Horrible Week

Sterling firmed after shedding nearly 3 cents last week which amounted to the U.K. currency’s worst week since February.

Upside for the Pound is seen more limited after recent opinion polls indicate a shrinking lead for front runner Theresa May in next week’s national vote on June 8.

“Sterling had soared some 4 percent after Mrs. May in mid-April announced Britain would hold snaps elections to try to tamp down on deep divisions in Parliament and coalesce the nation around more of a singular Brexit strategy. Sterling will remain vulnerable to anything that suggests Mrs. May a landslide victory is fading from view,” says Joe Manimbo, an analyst with Western Union.