Pound-Euro X-Rate More Likely to Fall to 1.10 than "Break Higher" says City Analyst

Pound exchange rate

Image © Lakov Kalinin, Adobe Stock

- Pound-to-Euro exchange rate at 1.1454 today, 0.25% higher

- Technicals playing a key role in GBP/EUR exchange rate moves

- The bar to going above 1.16 increadinly high

- Move towards 1.10 area a more likely prospect

The British Pound is trading a decent quarter of a percent higher than it was at the start of today's trade against the Euro, with gains coming amidst some decent employment data out of the UK economy that showed wage growth continue to easily outstrip the rate of inflation. 

This means the average UK worker is becoing increasingly better off, inspite of persistent fears about the state of Brexit negotiations. The average earnings reading without bonuses included read at 3.4% meaning wages are growing comfortably above the rate of inflation.

"A year ago the average Briton’s spending power was stagnating as paypackets were caught in the crosshairs of low wage growth and painfully high inflation," says Pawel Adrjan, UK economist at the global job site Indeed. "Now, as inflation slows to its lowest rate in two years, a series of strong rises in average wages has swelled both paypackets and workers’ spending power."

“Rising wages are a byproduct of Britain’s relentlessly tight labour market, which is still bumping along the ceiling of full employment," adds Adrjan.

While Sterling is higher on the day, we have heard from a leading City of London analyst that there are limits to the Pound's strength in the current environment, and if anything the currency is more likely to succumb to losses than break higher into fresh multi-month highs.

Bill McNamara - founder of The Technical Trader and a former analyst with brokers Charles Stanley - says after running higher in January 2019, the balance of risks for the Pound's movements against the Euro now lie to the downside.

"After running up to an intermediate high of 1.1576 towards the end of last month the UK currency went into retreat and, as the daily candlestick chart demonstrates, there’s a
technical explanation for that price action, which is that it represents a failure at resistance in the form of the peak that formed last April (at 1.157)," says McNamara.

Pound to Euro McNamara analysis

Traders saw the heavy resistance around 1.1576 and called time on the rally by booking profits, resulting in the Pound turning around and heading lower back to the 13s-14s that we are currently seeing.

This kind of action leads us to believe technical studies and technical levels remain highly relevant to the Pound-Euro exchange rate and we will continue paying close attention to the view of technical analysts who read price charts to determine future direction.

The fundamental explanation for the January 2019 advance in the Pound was a rapid rolling back of fears that a 'no deal' Brexit would happen in March 2019 when the UK is set to leave the EU. Markets believe a chaotic exit would be detrimental to the UK economy and its currency; therefore suggestions that the UK parliament will ultimately be able to prevent a 'no deal' Brexit have proven supportive for Sterling.

While Brexit anxiety certainly remains in plentiful supply with no signs the UK-EU Brexit deal has the backing to pass through parliament, analysts see little prospect for the required fundamental impulse that would push the Pound to fresh highs and through the kind of technical barriers mentioned above.

"The subsequent retreat has resulted in a drop back towards the middle of the range that has been in place since September 2017 and, given the economic and political outlook, a move back towards the low end of that range (at 1.10 or so) now seems more likely than a break higher," says McNamara.

McNamara's view appears to us to be a medium-term one, i.e. one taking in a timeframe that covers a few weeks.

"Sterling prices here have evidently stalled on the upside around 1.1600 in recent weeks subsequent erosion looks part of a broader/ongoing range," says analyst Trevor Charsley with foreign exchange brokers AFEX who is seeing similar levels as McNamara. "An eventual return to the psychological 1.1000 level cannot be ruled out."

However, Charsley adds "no such (direct) path appears open at present."

Pound Sterling Live's analyst Joaquin Monfort meanwhile sees some positive shorter-term developments in GBP/EUR which has formed a bullish hammer candlestick (circled in the below) and is trading above the 50-week moving average (MA) - also a bullish sign. But the exchange has yet to build any actual meaningful positive momentum.
Daily graph studies

The downtrend since the January highs has lost momentum recently and there is a cluster of MA's, including the 50-day and 200-day, all just underneath current price action in the 1.12s which are likely to obstruct further downside.

This increases the chances of a reversal higher.

"The cluster of MAs in the 1.12s are a major impediment to bearish progress and would have to be cleared before hazarding a forecast for a continuation lower," says Monfort.

Charsley agrees: "GBP values are instead supported around 1.1290/00 and until /unless this gives way negative risk appears relatively limited. Prior 1.1600 area peaks are probably out of reach initially as well though selling pressure also looks thin until 1.1500."

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