While the UK Pound is trading on resistance grounds against Euro, the Eurozone’s currency struggles to get away from its multi-year lows against the US dollar. We expect heavy action on the GBP charts in the week ahead, which will prove a matter of life and death for the GBPEUR exchange rate’s recent rally.
British Pound’s rally met resistance at 1.20 last week as expected and settled at 1.19 on Friday, very close to Monday’s open.
Nowadays, currency rates and their price action seem to have detached from fundamentals. For instance, following the result of the Italian referendum and Prime Minister Matteo Renzi’s resignation, one would expect for the Euro to weaken. Yet, the single currency in fact strengthened, although it collapsed towards the week’s end, as we’ll discuss further below.
Sterling’s action seemingly comes down to positive momentum at this time, having picked that up since the US election. Of course, Brexit talk hasn’t slowed down a bit. There is all kind of talk taking place right now, both for a soft and hard one, and investors apparently have stopped caring that much until real news make it to the headlines.
One would also expect other politics to play a key role here, however, as the Italian referendum demonstrated, no one can be 100% certain of how the market will react. Given the political calendar features lots of significant elections being held in Europe over the next 12 months, political matters should not be ignored, although the UK referendum and the US Presidential election’s effects are difficult to be surpassed in terms of their impact.
Turning to good, old-trusted technical analysis, GBPEUR had trouble overcoming the resistance level at 1.20 despite a brief penetration, much as predicted in our past analysis. Bullish market participants have tried twice to take control of the market at that level on July and September following the shocking Brexit vote, but they quickly surrendered, letting GBP price hit 1.08 on October’s flash crash.
The week ahead, Sterling investors will be on the lookout for Thursday’s Bank of England meeting. Any rate or policy change is very unlikely, though. In addition, UK inflation, unemployment data and retail sales will be brought under the spotlight mid-week, so we should expect some kind of volatility this week.
At the same time, Société Generale’s analyst suggests investing in US dollars and selling the Sterling. That comes as no surprise, given the strength the US single currency is showing for a month now. Combined with the key resistance level that GBP is currently trading at and RSI spiking (chart’s bottom graph), chances are that Sterling will need to pull back a bit during its two-month rally and now it’s the perfect timing, even if the UK ecostats remain robust!
Euro failed to pull back from its lows at 1.05 last week, printing a loss of about 1% against the US dollar.
Still, we’ve talked before of the support’s strength at 1.05. We need to go back to 2002 to find the last time Euro traded for less than 1.05 dollars, and that support has been tested at least three times over the last two years, with no signs of collapsing. Even the ECB’s extension of quantitative easing didn’t break that support, although it did bring Euro’s price down from 1.08 to 1.06 on Thursday! Yet, note how the price was rejected right on that declining moving average, a quite strong bearish sign to say the least.
It’s a thin week ahead in the economic calendar for the Euro, thus given the time it may recover from the multi-year lows. In a nutshell, the US dollar poses as the strongest single currency out of the three currently, with Euro looking to regain some of its losses against the UK Pound, unless the UK economy beats forecasts this week.