Pound Sterling peaked at 1.1525 against the Euro last week after a combination of easing Brexit fears and continued expectations that the Bank of England (BOE) will raise interest rates drove the UK currency higher.
GBP/EUR rose up to the top of its long-term range but then lost momentum and fell back down to the 1.1430/40s, where it spent most of Friday plateauing.
Our analysis of the technical structure of this market shows the sell-off was prevented from going lower by the R1 monthly pivot at 1.1430, which has put a firm floor under the Pound which could underpin the currency over coming days.
Pivots are price levels used by professional traders to gauge the trend and as entry points for buy and sell orders; they therefore are likely to have an influence on future market direction.
When a falling currency touches a pivot it can often bounce back up.
The effect is exacervated by short-term technical traders betting on the bounce and thus adding to the buying pressure.
It is not surprising therefore that the exchange found extra support at the pivot and it is possible this could be a platform for a reversal and the pair to start going higher again.
This is our base case scenario since the short-term trend is still bullish.
In our last forecast we also talked about how the pair was now trading in between the 10 and 20 period moving averages (MAs) on the four hour chart, which was traditionally considered a ‘buy zone’, which means an optimum level to buy the asset and join the dominant uptrend (in expectation of higher prices).
We further noted that we were on the lookout for a bullish reversal candle to form inside the buy zone to provide confirmation of a resumption of the uptrend.
Although we did get a long green bullish candle developing in the buy zone, a ‘bullish engulfing’ candle pattern (circled above), it was followed by weakness and due to lack of follow-through, we consider it not a very reliable signal.
If another more reliable bullish candlestick were to form at the current level and in the buy zone between the 10 and 20 MAs, such as one of those featured in the illustrations below then we could forecast a move up to a target at the 1.1525 first, followed by the 1.1550 range highs/upper channel line.
The range highs will continue to present an obstacle to higher prices as it forms the upper limit of a band that has been in place for six months now (see pic below).
The ceiling of the range, therefore, will probably reject the exchange rate as it has done on multiple occasions in the past (circled in red above).
Nevertheless, there is also a possibility the pair could break out of the range altogether, but, for confirmation, we would ideally need to see a break clearly above the range highs.
Another monthly pivot, the R2, is situated just above the range highs at 1.1581, and it is likely to be a further obstacle to the uptrend.
Therefore, we would ideally like to see a break above 1.1620, for confirmation of a clearance of R2 and the start of an extension up to the next target at 1.1770.
This is the minimum price objective calculated using the traditional technical method of taking the golden ratio (0.618) of the height of the range and extrapolating it higher from the break.
On balance, we see a greater overall chance of an upside breakout of the range eventually, rather than a downside breakout, for reasons outlined in our previous article on the pair here.
Data and Events to Watch for the Pound in the Week Ahead
Overall it is a relatively quiet week for the Pound on the calendar and the most likely source of volatility will probably be the ongoing Brexit debate.
The Pound strengthened last week after a transitional agreement was agreed by the EU in Brussels, which will now see the UK extend its stay by 21 months after the March 2019 deadline, on special terms, whilst a comprehensive trade deal is hammered out.
Brexit headlines are of course impossible to predict as they are generated by politicians and we will be monitoring the newswires for any potential points of interest.
From a purely hard data perspective, the main release is the third estimate of Q4 GDP on Thursday at 8.30 GMT, although the consensus sees little chance of a change from the second estimate of 0.4% growth quarter-on-quarter.
“The more significant interest for next week’s publication will come from the national accounts detail released at this time,” says Investec of the GDP release. This will include revisions to data on household income and personal finances in general, which affect overall consumer spending, the biggest driver of growth for the economy.
Should growth be downgraded unexpectedly we would certainly expect a soggy end to the shortened week for the Pound.
Current account data for Q4 is also out on Thursday, March 29, at 09.30, and is forecast to show the deficit widening to -24.0bn from -22.8bn previously.
Traditionally the current account was always seen as a major influence on currency levels but now there appears to be little empirical evidence of a link, so we do not see much volatility arising from this release.
The CBI Distributive Trade Survey for March is out on Wednesday, Mach 28 at 10.00 GMT and will provide the latest data on the retail sector.
“Launched in 1983, this widely followed survey covers questions on sales, orders, stocks, general business situation, employment trends and internet sales,” says the CBI website.
Other March data includes Gfk Consumer Confidence, which forecasts to remain at a -10 reading the same as February.
Investec, however, sees a chance of a lift to -8 in March because of rising wages, less job uncertainty, easing inflation, the agreement of a Brexit transition deal and “the uncharacteristically “Tiggerish” Chancellor at his inaugural Spring Statement.
Other data in the week ahead includes mortgage approvals on Monday at 8.30, Nationwide house prices on Thursday at 6.00 (watch for a negative result as this would make two negative months in a row and be bearish for Sterling); business investment on Thursday at 8.30, consumer credit at the same time and mortgage lending also at the same time.
Data and Events to Watch for the Euro in the Week Ahead
The Euro showed vulnerability last week after manufacturing and services data for March showed a continued slowdown and it is against this backdrop of slowing growth than the currency will be assessed in the coming week.
The next major set of releases for the Euro is inflation out the week after next, with only Germany inflation out in the week ahead, on Thursday at 13.00 GMT.
German inflation is not expected to be representative of inflation dynamics in the rest of the Eurozone, however, so it may have limited impact, according to analysts at Nordea Bank.
“We caution against reading too much into German inflation figures out next Thursday as the Easter effect could distort the picture – this month to the upside,” says Martin Enlund at Nordea Markets.
Eurozone loan growth and money supply for February, meanwhile, are out on Tuesday, March 27, at 9.00. The former is forecast to rise by 3.0% from 2.9% in January and the later to remain at 4.6% – the same as the previous month.
Loan growth and money supply are important for the Euro as the indicate credit dynamics and more take up or availability of credit is usually a positive sign for the economy, and therefore the Euro.
A whole load of sentiment indicators is scheduled for release at 10.00 on Tuesday, including the final estimate for consumer confidence in March, industrial, services and economic sentiment in March and business confidence also for March.
Source: Pound Sterling Live