Euro-to-Pound Rate Forecast to Decline to 0.8743 Next

The EUR/GBP exchange rate is pushing below the 50-day moving average (MA) following the release of higher-than-expected UK inflation data for August.

The rise in inflation increases the likelihood the Bank of England (BOE) will raise interest rates sooner than expected, which in turn contributes to a strengthening of the Pound.

Headline inflation rose by 2.9% in August, beating expectations of 2.8%, and Core inflation by 2.7%, well above the 2.5% expected, and the 2.4% of a year ago. 

The Pound was seen to be the best-performing major global currency as a result in the wake of the data's release.

But as Ranko Berich, Head of Market Analysis at Monex Europe notes, "the week is far from over for the Pound, "and whether or not Sterling can hold on to its gains may be decided by wage data out on Wednesday, which if below inflation, will continue to suggest consumers are getting poorer, and weigh on the outlook for growth and ultimately the Pound too, which could retrace today's gains."

Nevertheless, Sterling is turning increasingly bullish against the Euro.

From a technical perspective, EUR/GBP has been under pressure through September and the latest impulse lower has  taken it to significant support in the 0.90s.

One area of support is the 50-day Moving Average, and a key Fibonacci retracement, which, according to Karen Jones, a technical analyst with Commerzbank, makes this a 'make-or-break' level for the pair.

"EUR/GBP has severed its 4 month uptrend. This leaves it under pressure and our attention has reverted to the 0.8743 14th July low," says Jones.

EUR/GBP at 0.8743 gives us a target on the Pound-to-Euro exchange rate at 1.1438.

"Initial supports ahead of here lie at 0.8930/0.8813, these are the 38.2% and 50% retracements of the move up from April. Intraday rallies are indicated to hold below 0.9065," says Jones.

Our own view is that the pair has broken below several key layers of support, including the R1 monthly pivot at 0.9056, but that the 50-day could still prevent further weakening, and so confirmation that had also been breached we would first want to see a break below the 0.90 level.

At the time of writing the exchange rate is at 0.90, so the level remains alive. (0.90 EUR/GBP = 1.11 GBP/EUR).

Such a break would probably lead to a move down to a target at 0.8900 initially.

For GBP/EUR this would therefore roughly translate as a break above the 1.1100 level, targeting 1.1200. 

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