Pound-to-Euro Exchange Rate Suffers Profit-Taking, but Could Still go to 1.1950


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- Sterling rally pauses

- McDonnell comments on Labour MPs not backing May's deal cited

- We are sceptical of this argument

- AFEX say upside moves towards 1.19 still likely

Pound Sterling is seen to be under pressure against the Euro and other major currencies on March 05, with markets awaiting the next round of developments regarding Brexit.

With a March 12 deadline looming for the second 'meaningful vote' on Prime Minister Theresa May's Brexit deal, foreign exchange traders are seen to be paring back exposure to the Pound following 2019's strong run, eyeing potential negative surprises over the coming fortnight. The Pound-to-Euro exchange rate is quoted at 1.1590, having been as high as 1.1683 in the previous week.

We are seeing some currency market commentators suggest the decline in Sterling comes following comments from the Labour Party's John McDonnell that there are very few in the opposition who would likely back the Prime Minister's deal. McDonnell is Labour leader Jeremy Corbyn's defacto deputy, and hence why some might be attributing Sterling's decline to the comments. 

However, we feel this is a case of commentators fixing a narrative to a move, and not the other way around. There is nothing new in McDonnell's comments: we always knew a majority in the Labour party would vote against the deal. 

Despite the decline, we hear bulls are likely to remain in charge of GBP/EUR direction unless there is a substantial deterioration in the exchange rate.

Technical studies of the Pound-to-Euro exchange rate from foreign exchange brokers AFEX confirm the pair has turned decidedly more bullish over medium- to longer-term timeframes.

AFEX - who trade more than $15bn in foreign exchange each year - say the outlook for Pound Sterling on both the daily and weekly timeframes have improved of late following the currency's recent break above 1.16 euros.

"While the path higher may well prove more erratic than has been the case in recent sessions only a sell-off back under 1.1300 would damage this positive tone," says Trevor Charsley, technical analyst with AFEX.

AFEX Pound to Euro exchange rate chart

Sterling has powered back above 1.16 in February amidst a growing belief by foreign exchange traders that a 'no deal' Brexit will ultimately be avoided come March 29, the official Brexit day.

February has seen Prime Minister Theresa May offer parliament a vote on extending Brexit in the event of her deal not being passed by the March 12 deadline, which signals to markets parliament will ultimately find a way around avoiding a worst-case outcome for Sterling.

As is often the case when Sterling is subject to high-risk political influence, we would expect the potential for volatility over coming days and weeks, particularly if May's deal is rejected for a second time.

But, Charsley says to expect any re-emergent weakness "to uncover decent demand around 1.1500 and bear risk should prove limited thereafter".

"Some supply is apparent in the 1.1750 region but once broken an extension to 1.1850/1.1950 appears feasible next," forecasts the analyst.

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