New Forecast for Euro to Pound Rate shows it Could fall to 0.8602

Exchange rate decision

The EUR/GBP exchange rate has been moving higher over recent weeks on improved sentiment in the Eurozone and a reduction in political risk plays into a stronger Euro exchange rate complex.

Indeed, we can see that over the course of the past month the Euro has outperformed all its major competitors, besides ZAR and SEK.

But, over recent days the British Pound has outperformed following an optimistic Bank of England monetary policy statement and unexpected surge in inflation data.

The Pound has strengthened even further on Thursday, March 23 following the release of better-than-forecast retail sales data that confirms the UK consumer remains confident and could therefore carry the UK economy through upcoming Brexit negotiations.

As a result EUR/GBP has pulled back from its 0.8788 March 14 highs down to 0.8612.

Pound to find upside purchase against the Euro

These levels are however significant to a technician such as myself as we now see the EUR/GBP exchange rate sitting just below the level of a major monthly pivot at 0.8658.

What does this mean for the outlook?

If the Euro had defended the line, there was a possibility that the exchange rate could use this support as ‘purchase’ for a move higher.

"As for EUR/GBP we still can’t exclude an extension up to 0.8854 and to 0.8949 as long as 0.8649 is providing support," says Thomas Anthonj at JP Morgan in London.

But, a break below it would be expected to clear more pro-EUR positions out of the market and encourage increased selling pressures.

For now it appears that a break lower is transpiring and further weakness is likely.

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But Beware - This Could be a Flag Pattern

But, there is another signal that suggests we should not get too negative on the Euro.

We could also characterise the long streak of virtually unending green up-days in January as the ‘pole’ of a bullish flag pattern.

A move higher from here would be in keeping with the flag hypothesis and see the pair move up, initially to the former 0.8788 highs, followed by a continuation up to 0.8850 and then 0.8900.

A break above the 0.87312 highs would provide initial confirmation of the start of the flag’s breakout.

If this is a flag the end target would be calculated from extrapolating the pole from the point of the breakout of the flag higher, leading roughly to a longer-term target in the 0.90s.

For this flag pattern to be confirmed we will need the Euro to enact a turnaround sooner rather than later.

Analysts believe the turnaround will come.

"We remain skeptical about sterling’s fortune in the near term," says a note from UniCredit Research. "We expect more and clearer evidence that the UK economy will further deteriorate going forward and although PM Theresa May will formally announce next Wednesday that Britain will trigger Article 50 and start the Brexit process, negotiations with Brussels and the political debate in the UK are likely to remain tense."

This implies markets staying nervous leaving sterling exposed to further volatility for the time being.

"In our view, this will probably be much more evident against the (rebounding) euro: regressions of EUR-GBP on the 2Y real-yield swap differential between the eurozone and the UK are currently pointing to an exchange rate slightly above 0.90," say UniCredit.

Expect More Euro Downside say Commerzbank

At odds with a potential 'flag pattern' reading is Commerzbank’s technical analyst, Karen Jones, notes the presence of a major trend-line from the October highs capping activity.

She argues this trendline needs to be overcome for a more bullish outlook to take shape and therefore maintains a negative stance on the Euro's prospects at this point.

Pound Sterling to euro analysis Commerzbank

"The market remains near term downside corrective. We continue to suspect that the market has lost upside impetus and will slide back to the 55 day moving average at 0.8602," says Jones.

At the time of writing the EUR/GBP exchange rate is quoted at 0.8648.