The euro exchange rate complex is vulnerable to downside pressure over the week ahead we believe.
Risk remains tilted to more euro weakness as markets awaken to the fact the ECB could cut interest rates further in 2016/2017.
Draghi told us at the much-hyped March policy meeting and press conference that it was only under current conditions that the ECB would not be cutting rates any further, but if conditions changed it might.
The ECB announced a set of formidable measures to stimulate Eurozone economic growth while the increased supply of euros into the market will certainly weigh on the single currency over coming weeks in our view.
Be aware that the euro is likely to suffer when stock markets are rising and benefit when they are falling.
This dynamic is testament to the latest cut in Eurozone interest rates - it is now cheaper than ever to borrow euros to fund stock market bets across the globe.
So when markets are up the euro is likely to suffer selling pressure as investors buy foreign currencies to fund investments.
The pound seems to have absorbed most of if Brexit risk premium now, unless poll results get any worse.
If anything, pound sterling seems to have found a bottom in its Brexit-inspired decline and there may now be a chance of a rebound if polls tilt towards the UK staying in the EU.
The position of the Bank of England was described as mildly pro-European after Carney’s testimony to the Parliamentary Committee on Brexit, which was a major blow to the ‘out’ campaign.
Data That Will Drive the Euro This Week
For the Euro, Industrial Output is released on Monday, this data set has been incredibly week of late.
In the previous month of December, it fell by a shocking -1.3% from plus 1.4% previously.
If we get another negative result and it looks like a down-trend is developing it could put pressure on the euro.
Euro-area Quarterly Employment Change rose by 0.3% in the third quarter and 1.1% year-on-year.
The Inflation data on Thursday is a final estimate for February.
The initial estimate shocked markets when it showed a -0.2% fall in inflation in February.
The Week Ahead for the British Pound
It’s a busy week for the pound – especially Wednesday.
First there is employment and wage data and then a budget speech from the Chancellor.
There is a possibility unemployment and wage data could shock to the downside give the poor data recently and evident slow-down in the economy, and this would push sterling lower.
Interestingly, weakening data could have either of one or two affects.
It could weaken sterling due to fears of a recession – or it could strengthen the ‘stay’ campaign because of increasing fears a Brexit would result in more of a slow-down.
The Budget rarely has a very large impact on the pound, but this week it is likely to have a dampening effect, if anything, due to the view that the chancellor is likely to increase austerity at the expense of growth and this is seen as detrimental to the Bank of England’s accommodative monetary policy objectives.
According to Capital Economics’ Scott Bowden the two do not tow easy bed-fellow make:
“Remember, the Government’s fiscal mandate calls for a surplus on public sector net borrowing (PSNB) by 2019/20. The Chancellor may even increase austerity further if the OBR presents him with detrimental forecasts.
“This contrasts with the extremely loose stance on monetary policy. Indeed, with the MPC certain to keep interest rates on hold on Thursday, Bank Rate is set to have been at a record low of 0.5% for seven whole years. This doesn’t necessarily make for the ideal policy mix.”
Finally, the Bank of England has its rate meeting on Thursday March 17.
Whilst no-one really expects a rate change, it’s the minutes which will be carefully scrutinised both from a monetary policy perspective and also possibly for members’ views on Brexit.
Overwhelming concern about the fall-out from Brexit could play into the stay campaigns’ hands and lead to gains for the pound.
Betting agents are already making stay a favourite, despite neck-and-neck polls, and if the impression starts to grow that the ‘in’ campaign is likely to win the referendum then this could catapult sterling higher due to the massive risk premium in the recent decline. We see risks therefore skewed to the upside for the pound due to this Brexit premium being taken back as the campaign potentially polarises around a pro-EU win.
Technical Forecasts for the GBP to EUR Exchange Rate
Momentum indicators are advocating for further upside with a key technical signal, the MACD, rising strongly, in line with the trend higher.
In short, the trend at the present time is higher and we would err towards favouring the British pound over coming days as a result.
The pair has formed an inverted head and shoulders.
Volume is supportive of a break higher on the right shoulder.
This is when the exchange rate makes a low as happened on the 11th Feb (left shoulder), it recovers, makes another deeper low, as GBP/EUR did on the Feb 25 (the ‘head’), recovers and then makes another low (right shoulder), which is not lower than the head, as the pair did on March 10.
Continuation of dominant down-trend is still possible if confirmed by break below head lows at 1.2605 – down to 1.2508 and the S1 Monthly Pivot.
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