Resistance looms on charts as sentiment, direction of economic data set

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– GBP / EUR hit the turning point in the middle of the July rally rally.
– As a 55-day moving average of 1.12, the guards go back to 1.15.
– Investor sentiment, results and UK data on GBP headquarters.
– Time on the clock sees Brexit talks fading in the background for the pound.

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The pound-to-euro exchange rate corrected upward in July, although the week ahead will determine whether this move is just a rebound from oversold levels or the start of a more prolonged turn higher that lasts longer.

The British pound was the second best-performing currency last week after remaining deaf in Brexit trade negotiations and preferring instead to draw inspiration from investors’ half-full view of the global economic outlook, which has enabled it to become a outperformer in early July.

The British pound fell from its lows at the end of June near 1.09 to find itself testing its 55-day moving average just under 1.12 on Friday, and whether it will exceed this level in the coming days will help to determine the outlook until the end of the month.

“The EUR / GBP slide from its high of .9178 in June brought it closer to the 55-day moving average and the low of June to .8924 / .8864. This area that we plan to support. If not, the 200-day average move at 0.8708 would be back in sight, “said Axel Rudolph, senior technical analyst at Commerzbank.

A daily close above the moving average close to 55 days this week would open the door to a bigger and more significant 200-day average challenge close to 1.15, while failing to maintain movement above could be the harbinger of a future comeback towards the end of June below 1.10 with regard to the technical table. Rudolph and the Commerzbank team are looking for a failure at 1.1199 and a lower drift towards 1.05 in the coming months.

Above: Rate of pound to euro at daily intervals with S&P 500 (orange) and moving averages of 21, 55 (red) and 200 days (green).

“Serious differences” remained between the two sides in Brexit trade negotiations last week, but the pound sterling closed further against all of its major rivals other than the Swedish krona in another demonstration of the new desensitization of the delivers to the evolution of the long-standing saga.

“Although a UK / EU-27 FTA covering a range of goods is likely by the end of the year, UK trade policies will be evolving beyond 2020. What 2020 will do , this will be a starting point for the ongoing UK / EU-27 trade adjustments. regulatory alignment, arbitration of disputes and trade frictions are likely to arise as problems in the medium term, “said Stephen Gallo, European Head of FX Strategy at BMO Capital Markets. “We would be inclined to soften the strength of the GBP against the EUR if it returned to 0.8650 [GBP/EUR: 1.1560].  »

The accelerated talks continue until the end of July and, even then, the two sides will still have until the end of the year to reach agreement on preferential trade terms or to extend the transition. from Brexit until 2021.

In addition, the pound has already dropped considerably against all the majors this year and has always remained among the worst performances of 2020 on Friday.

This could mean at least for the moment that the pound sterling will continue to ignore the statements made by negotiators and political leaders on each side, instead continuing to draw inspiration from changing economic conditions as well as sentiment of investors that is reflected in the stock markets.

“Johnson made a solemn promise before the UK left the EU in late October last year. Almost at the last second, he then asked that the withdrawal date be postponed until the end of January after all. So it is not unreasonable to assume that the government simply wants to put pressure on the EU, but that it would ultimately give up if no agreement was reached, “says Thu Lan Nguyen, a Commerzbank colleague at Rudolph . “Volatility is expected to increase particularly towards the end of the year, when the UK is expected to effectively exit the EU single market. ”

Above: Pound to euro rates at weekly intervals with moving averages of 21, 55 (red) and 200 weeks (green).

Stock markets and other risky assets, including some currencies like the British pound, have defied gravity in recent months as investors bet that economies would rebound quickly after this year’s historic economic status quo caused by the coronavirus. This week, investors will find out if they were right.

“We do not expect progress in the Brexit negotiations the week or during the summer as a whole, which means that the positive catalysts for the GBP rise should be rather rare, “says Petr Krpata, EMEA chief strategist for FX and bonds at ING. “The market will closely monitor indications from US banks as the earnings season approaches Tuesday. Any significantly higher provisioning for source loans or lower guidance (although only 49 of the S&P 500 companies currently provide guidance!) To insert more equity volatility into the equation. ”

The months of May and June would have marked the start of a recovery for the major economies which experienced their first full month of foreclosure in April, so this week’s May GDP data for the UK this week and profit data for US second quarter businesses will have implications for the Pound and other currencies.

In turn, the response observed on the stock markets and the pound sterling will determine whether the correction of the rate of the pound sterling against the euro fails at the 55-day moving average near 1.12, or whether it continues or if it moves up to 1.15 in the pipeline.

“With record earnings visibility across the S&P 500 through the first quarter, earnings estimates and guidance from US banks and non-financial corporations weigh on the sentiment of risk. In particular, the perception that US banks have of the economy will provide insight into the flow of credit, non-performing loans and the growth trajectory. Narrow price ranges between currencies, high-yield debt and stocks suggest heightened uncertainty in the next stage, as worsening of the new pandemic, fiscal stimulus and economic data add to the likelihood of a downward rupture of risky assets “, warns Daniel Been, head of FX research at NAME.

Tuesday at 7:00 am marks release of May GDP data and consensus is looking for a 5% rebound to follow April’s drop -20.4% from what was the second month of “complete lockdown” from the United Kingdom. At the same time on Thursday, investors will investigate whether any of the estimated 1.5 million new welfare claims since the start of the national closure in March begins to appear in the official unemployment rate, which is gone from 4%. at 3.9% since March.

A faster-than-expected economic rebound in May could dissipate some of the gloom around the pound and allow a continuous rebound in the rate of the pound to the euro, but in the absence of any declaration of progress towards a trade agreement in the Brexit negotiations, the pound resumption of the recovery could prove to be short-lived.

In the event that progress is made in trade negotiations, the rate of the pound on the euro could end up on the way to 1.17 or more.

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