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Pound-to-Euro Exchange Rate Eyes 1.10, Johnson-Merkel Meeting Dominates Today's Agenda

Merkel EU

Image © European Union

The Pound-to-Euro exchange rate crept towards the 1.10 barrier over the course of the past 24 hours, having gone as high as 1.0987 on Tuesday.

Pound Sterling has since however pared gains and the pair has faded to 1.0955; the exchange rate is however 1.26% higher than it was at this point last week.

The Pound was under pressure earlier on Tuesday amidst growing signs that the impasse between the UK and EU over the state of Brexit negotiations was becoming evermore entrenched, suggesting a 'no deal' Brexit on October 31 remains a possibility.

Sterling tends to decline when this probability rises, and the strong rejection by the EU to Prime Minister Boris Johnson's demands that the Northern Irish backstop be removed from any deal saw those probabilities tick higher on Tuesday.

However, the Pound found its legs in the afternoon session when German Chancellor Angela Merkel said the EU is ready to find a solution on the Irish border question.

"We would naturally think about practical solutions. And I've always said that when one has the will to find these solutions, one can do so in a short period of time," Merkel said on a visit to Iceland.

"Sterling shot higher in a brief flurry of buying panic as algos were triggered by comments from Germany’s Angela Merkel on Brexit. She said Germany would think about ‘practical solutions’ to the backstop, adding that this is a matter of the political declaration, not of the withdrawal agreement," says Neil Wilson, an analyst with Markets.com.

Pound to Euro chart

Johnson heads to Germany tonight where he will meet with Merkel to further discuss the issues preventing the EU and UK achieving a Brexit deal.

Press reports suggest Johnson will say to Merkel that Parliament cannot prevent a 'no deal' Brexit. Johnson and his advisors are of the belief that the EU are refusing to move towards compromise because they believe the UK Parliament will ultimately step in to thwart Johnson's plans.

Johnson told Sky News last night: “I am going to go at it with a lot of oomph as you’d expect, and I hope we will be making some progress in the next few weeks. But one thing that slightly complicates the picture is that our EU friends still clearly think there is a possibility parliament will block Brexit.

“As long as they think there is a possibility parliament will block Brexit they are unlikely to make the concessions.”

We believe that should Merkel provide further supportive comments that hint at compromise then Sterling could remain supported.

The Pound remains a headline-driven currency and therefore we remind readers looking to move into our out of Sterling that it will remain a volatile prospect over coming weeks.

"We view any days of GBP strength as a fade and see more sterling weakness ahead as we get closer to potential early elections, a road to which will still be very tricky and characterised by hard Brexit risks," says Petr Krpata, a foreign exchange analyst with ING Bank in London.

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Concerning the technical outlook for the Pound against the Euro, Karen Jones at Commerzbank says the Pound has failed on an initial test of the 31 July high at 1.10, but it remains engaged in "corrective" price action that could take it higher.

The exchange rate has apparently "temporarily" bottomed at 1.0721, and the market has already bounced back to the 1.10 July 31 high.

Jones is looking for strength to potentially extend to the 55 day Moving Average at 1.1084, saying there is even scope for the move to reach the 50% Fibonacci retracement at 1.1241.

However, be warned, conviction for such a move remains low owing to further conflicting signals on the charts.

Robin Wilkin, a cross-asset strategist with Lloyds Bank agrees that the current bout of Pound Sterling strength is corrective in nature, as opposed to representing a new trend higher.

He says that because of this, while the exchange rate remains above the 1.0899-1.0875 support levels he sees "the risks of another test" of 1.10.

A clear break of 1.10 would suggest to him that a significant low has developed at 1.0828.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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