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Pound sterling risks weakness against the euro in the coming five days.
The pound-euro exchange rate drifts lower on Monday in response to signs of rising tensions in the Persian Gulf as the U.S. seizes an Iranian cargo ship and Iran responds by pulling out of planned negotiations.
The pair falls to 1.1476, which is just below the 200-day simple moving average, at 1.1485, a level that it has been hugging for the past two weeks.
Rallies have for the past week been capped by the shorter-term 21-day MA, now at 1.1496, with the pair failing to close above here since March.
The takeaway from this observation is that the pound is still in a short-term downtrend against the euro and we are inclined to respect that for the coming week.
From here, lows at 1.1460 are now targeted (the two-week lows) ahead of the April lows at 1.1440. From here, the longer-term range lows at 1.1430 are considered.
Noticeably, these levels are all relatively close at hand, which tells us that support is very concentrated in the low-1.14s, which should keep losses relatively limited.
For material downside to occur, we would need to see a decisive trigger to the decline.
Geopolitics is an obvious source of potential weakness as pound-euro tends to decline when markets selloff. We're watching Trump's patience running out with Iran and wonder if he might really go ahead and restart a kinetic war.
"We’re offering a very fair and reasonable DEAL, and I hope they take it because, if they don’t, the United States is going to knock out every single Power Plant, and every single Bridge, in Iran. NO MORE MR. NICE GUY!" said Trump overnight.
Domestically, Keir Starmer will be answering questions about the Peter Mandelson scandal on Monday, while on Tuesday the civil servant he fired last week for not telling him Mandelson had failed a security vetting will be answering questions.
Will this be the downfall of Starmer? We think not as there are no replacements ready to move, meaning this should be a low-key risk event for pound sterling.
Tuesday sees the release of UK labour market data for February. There could be some signs of early stabilisation in the data, which should help the pound. However, this data falls before the war in the Middle East and could therefore be overlooked by markets.
Wednesday's inflation figures will be more interesting as they are for March and will reflect the surge in fuel prices caused by the war.
The uptick in inflation is expected and is therefore unlikely to have lasting implications for pound sterling.
That being said, any upside surprises in the domestically-focused core and service inflation components would be worth noting as it implies the Bank of England will have to consider raising interest rates in the coming months.
For the pound, that could prove supportive.