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The Pound's 2019 Recovery Against the Euro Can Continue say AFEX

Pound Sterling London broker

Image © DragonImages, Adobe Stock

- Pound's rally stalled short-ter,

- Extension of "recovery sequence still possible" over coming weeks

- GBP/EUR quoted at 1.1574 today

A foreign exchange analyst at a leading London currency brokerage tells us 2019's move higher in the Pound-to-Euro exchange rate is not necessarily over, despite the soft trade we have witnessed since a lengthy Brexit delay was announced.

"Recent sideways activity cannot yet be confirmed as distributive and indeed provided GBP values manage to keep prior 1.1800 highs in focus an extension of this 2019 recovery sequence is still possible over coming weeks," says Trevor Charsley, an analyst at brokers AFEX.

The British Pound is holding a 4% advance against the Euro for 2019, with the exchange rate currently trading at 1.1588 but having gone as high as 1.18 in March.

The Pound has rallied through 2019 on the basis that a 'no deal' Brexit would be unlikely, and this market assumption has thus far proven correct with the UK and EU delaying the Brexit date on two occasions now. The latest delay would mean the UK only leaves on October 31.

But the Pound appears to have fully digested expectations for a 'no deal' Brexit to be avoided, and the currency therefore awaits fresh news to drive it higher.

According to Charsley, the recent set-back looks "more obviously corrective/re-consolidative".

Pound's rally not yet dead

The view that Pound Sterling can still extend higher against the Euro held by AFEX appears to rest with a longer-term view of the exchange rate, the theme we are picking up for the near-term is certainly one of consolidation.

Karen Jones at Commerzbank sees a bout of consolidative price action setting in, saying the Pound should remain supported against the Euro for now.

"EUR/GBP continues to consolidate at the 55 day moving average," says Jones in a briefing to clients.

Currently, the moving average for GBP/EUR is located at 1.1572, and the exchange rate is "somewhat stuck at this zone."

Near-term, the Pound has underperformed its rivals and over the course of the past month it has fallen against all currencies that make up the G10:

Pound underperformance

So what we have is a picture of emerging of an exchange rate that while still possibly bullish long-term, near-term direction is pointed lower, albeit there is nothing sinister yet apparent to suggest a big decline is in the officing, rather the move lower is most likely part of a period of consolidation.

While the general feel regarding the Pound-Euro exchange rate is one of a currency pair that is well supported, with the potential to go higher, those watching the exchange rate should of course be wary of a deterioration in the outlook.

But what would such a deterioration look like?

"A top may yet form if the market accelerates beneath projected 1.1450 support first/next. On this basis shorter term technicals at least will deteriorate -targeting 1.1350/1.1250 areas thereafter instead," says Charsley.

Jones says if the exchange rate continues to hold below the 1.18 March high it could be a sign the exchange rate has peaked near-term.

Our analyst Joaquin Monfort writes in his week-ahead note that we should not ignore the potential for the formation of a topping pattern in the exchange rate.

Daily chart Pound Euro

"One bearish factor, which cannot be ignored, is a pattern, quite probably of the ‘topping’ variety, has been forming at the highs on the daily chart," says Monfort.

While there is the potential for a topping pattern Monfort is of the view it is too soon to call the end of the uptrend and "we are neutral until a substantial directional move evolves in either direction clarifying the trend."

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