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- Pound Sterling in overwhelming downtrend vs. Euro
- But, some strategists argue selling pressures set to ease
- "We continue to think that GBP downside (absent Corbyn) remains capped" - Citi.
The Pound-to-Euro exchange rate must record a solid recovery against the Euro on Friday, July 12 if it is to snap a record losing streak.
The exchange rate appears set to endure its tenth weekly loss against the Euro: to put this in perspective, such a run has never occurred against the single-currency, and if we look back to pre-Euro times we can see no record of such a run of losses.
The Euro was launched in 1999, and analysts look at the performance of the Pound against Germany's old Mark when building long-term perspectives.
Sterling did put in a rally against the Euro on Thursday, with gains taking the exchange rate to 1.1166 at one point, however the rally proved unsustainable and at the time of writing we quote the exchange rate at 1.1128.
We have warned over recent days that any strength in Sterling would tend to be fleeting and would likely only encourage market participants to enter the market to bet against the strength.
"We think GBP gains may be temporary, reflecting short-term bargain hunters and USD weakness rather than any real upturn in GBP sentiment," says Shaun Osborne, a foreign exchange strategist with Scotiabank.
The ten-week run of losses confirms momentum remains bearish, and technical traders would therefore be inclined to follow the trend, rather than try and take a risky counter-trend bet on a recovery.
After all, how do you confidently call the bottom to such an entrenched decline?
"With little changing on the political or Brexit fronts (2019-20 election risk is still elevated at 72% and Johnson a near-certainty as next PM), the bounce in GBP over the last 24 hours, after a month of almost uninterrupted losses, looks more flow and technically-driven than a fundamental change of direction," says Adam Cole, a foreign exchange strategist with RBC Capital Markets.
For Sterling, political uncertainty remains the central ongoing concern.
"Regardless of the winner of the Conservative leadership contest, UK Parliament cannot agree on a Brexit ‘deal’ of any form. Thus, Q4 general election remains our base case," says Citibank in a recent client briefing. "The new PM can change or bypass Parliament, i.e. choose between a general election and a second referendum. We expect the former, most likely in December."
The threat of a General Election in 2019 is one we remain wary of, noting that Sterling tends to underperform and suffer volatility in the run-up to major votes. Such a vote in 2019 could invite particularly high levels of volatility given the stakes that are involved on Brexit. The threat of a far-left Corbyn-lead Labour Party gaining control is an additional fear for markets.
However, Citi do caution against expecting a major decline in Sterling at this juncture, suggesting the currency might be bottoming.
"Currently GBP remains much lower than its long-term fair value," says Citibank. "We continue to think that GBP downside (absent Corbyn) remains capped."
Citibank project some GBP outperformance "in the medium-term", particularly against the U.S. Dollar as the Federal Reserve may provide insurance easing to the slowing economy.
"While the UK's political and macro backdrop remains shaky, we think sterling looks oversold against a range of G10 counterparts," says a client briefing note from investment bank TD Securities. "The medium-term outlook remains uncertain, but a shorter-term view suggests a lot of bad news may already be in the price."
TD Securities say "much will hinge" on whether GBP/EUR can break back above 1.1168, as this appears to be a signal that downside pressures would be easing.
Technical analyst Karen Jones, with Commerzbank in London, has been watching the Euro's progress against the Pound in the short-term and says the single-currency's progress is looking less convincing than has been the case of late.
Jones notes that the Euro has been unable "to sustain a break above 0.9000 currently and the new high has not been confirmed (again) by the daily RSI."
In GBP/EUR terms, this suggests GBP/EUR does not look comfortable below 1.11, and from a technical persepective, this could suggest downside pressures are fading near-term.
If this is the case then it could be that Sterling's run of losses against the Euro and Dollar might start to fade, and we would expect the currency to 'bump along the bottom' as markets await more clarity on the Brexit process.
This will only come as the Brexit deadline of October 31 approaches, and we therefore expect increased volatility this Autumn.
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