Pound to Euro: Forecast for Week Ahead
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Looking at the charts to begin with, the pound to euro has formed what is known as a triangle pattern on the four-hour chart (see chart below).
The triangle is now complete having unwound the minimum five waves (a,b,c,d and e).
It is therefore likely to break either higher or lower in the week ahead.
If the exchange rate moves above 1.2100 that will probably confirm an upside break and lead to the pair extending its rally to 1.2200.
Alternatively, a move below 1.1850 level would confirm a downside break with an initial target at 1.1800, followed by 1.1700 and 1.1600.
Looking at the daily chart now and we see the long post-Brexit down-trend preceding the triangle, which is now smaller, however, owing to the greater distance on the wider daily timeframe.
The daily chart produces an overwhelmingly sense that the exchange rate will break out of the triangle higher rather than lower.
There is something not quite right about a downside break occurring at this juncture, and there is definite sense that the pair will unfold a leg higher out of the triangle, which on the daily chart looks like the middle ‘B’ wave of a three wave correction.
As such the daily makes us prefer a bullish scenario over bearish, with a break above 1.21 leading to a move up to 1.22, and then possibly 1.23 etc.
Outlook for the euro in the week ahead
The most significant hard data for the euro in the week ahead will be CPI in July, which will be published on Friday 29th.
It is expected to come out at 0.1% - the same as June.
Eurozone Manufacturing and Services PMI’s for July, released on Friday, showed the Eurozone economy coping quite well after the shock of Brexit, but July CPI will be another useful barometer of how the UK’s departure from the EU has affected the Eurozone economy.
The inflation data will also influence central bank policy and whether the ECB decides to press the button on further stimulus in September.
The ECB’s July meeting on Thursday suggested a change of stance to a more ‘wait-and-see’ approach in regards to more stimulus; this was viewed as a shift to a more neutral stance by analysts, many of whom had seen a high probability of easing in the autumn.
The results from the European Banking Authority’s (EBA’s) EU-wide bank stress tests will be published on Friday.
Whilst the majority of banks are expected to pass the tests, there are some in certain countries, which may struggle.
Italian banks have struggled to keep their capital ratios in line with regulator’s guidelines as a result of a mixture of Brexit impact on bank stock prices and the high number of non-performing loans on their books, weighing on their profitability.
In relation to the stress tests Nordea Bank’s Tuuli Koivu, comments that:
“At the aggregate level, we do not expect the results to bring surprises given the generally rising trend in banks’ level of capital. However, continuously weak economic development has raised risks in some countries as banks are suffering from non-performing loans and low profitability which has complicated banks’ efforts to improve the capital ratios. Thus, it is likely that the stress tests find a need for improvement at least in few banks.”
UK data in coming week
Second quarter GDP data is the main release for sterling in the week ahead.
Currently analysts are expecting a 0.5% rise from 0.4% previously (qoq), and 2.1% from 2.0% yoy.
The result will be overshadowed by the negative impact of Brexit, however, which renders the data for April-June somewhat redundant in terms of future economic developments.
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