Euro Forecast to Stay on the Defensive vs. Pound: Commerzbank's Jones

Pound Sterling vs. Euro

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- Sterling pointed higher according to chart analysis

- Brexit Party decision to withdraw candidates aids Sterling gains

- 1.18 high in sight, but only if 1.1667 is broken first

Pound Sterling is being tipped to remain bid against the Euro going forward by a leading technical analyst, however gains might be limited in the near-term as currency markets await further developments out of the ongoing General Election campaign.

Karen Jones, Team Head of FICC Technical Analysis Research at Commerzbank says the Euro is expected to stay on the defensive against the Pound over this period, as the EUR/GBP exchange rates is "starting to break down from its range."

The Euro dropped sharply against the Pound on the back of the developments of news the Brexit Party of Nigel Farage will not contest seats currently held by the Conservative Party of Boris Johnson.

Markets are of the opinion this opens the door to a stable Conservative majority being voted into power on December 12, an outcome that would allow Parliament to pass the Brexit Withdrawal Agreement Bill in early 2020.

On the back of these developments we saw EUR/GBP going down from an open at 0.8624 to record a close at 0.8583. Looking at the exchagne rate from the other angle, GBP/EUR went higher from 1.1595 to 1.1650.

In a note to clients released Tuesday, Jones adds that any move below 0.8571 in EUR/GBP allows for the recent slide in the exchange rate to extend to the 0.8465 2019 low. At present the EUR/GBP is at 0.8594, so we would need to see another pulse of weakness in the Euro to unlock this target.

From a Pound-to-Euro exchange rate perspective, this therefore means a break above 1.1667 opens the door for the rally in Sterling against the Euro to extend back to the 2019 high located at 1.1813. The GBP/EUR is currently located at 1.1636, having been as low as 1.1086 in early October. 

Jones notes that a significant area of support for EUR/GBP is located at 0.8485 (resistance for GBP/EUR at 1.1785), this support could see the Euro finally stabilise, thereby putting the forecast target for the latest impulse of Sterling strength around the 1.1785-1.1813 area.

Pound to Euro graph

Robin Wilkin, a cross-asset strategist with Lloyds Bank is not of the opinion that the Pound will see much sustained upside in the near-term, "more likely is that we dig in over those levels and return to range environment into the General Election," says the analyst in a note to clients released Tuesday.

Wilkin is looking for the exchange rate to remain stuck below a "formidable" layer of resistance located in the 1.1730-1.18 region "at this stage".

While further strength might be hard to unlock, the Pound is nevertheless expected to remain relatively well supported against the Euro in the current environment of growing expectations for a Conservative majority to be the end-result of the looming December 12 General Election.

Foreign exchange markets see a Conservative majority as offering the most stable route forward for the UK economy, and overcoming Brexit uncertainty. The prospect of a Brexit deal being signed earlier in 2020 on the back of such an outcome to the election would put to bed three years of uncertainty over the UK's withdrawal from the EU.

"I think this is the first time we've ever said 'Nigel Farage did Sterling a favour', but his move yesterday to only contest Labour held seats at the election, had the market buying into the Pound with the underlying logic that this reduces Corbyn's prospects of moving into Number 10 and as they'd rather take Boris' Brexit deal than Corbyn's economic policies Sterling went higher by almost a percent at the time," says Mark Palmer, an analyst at Hamilton Court FX.

However, there is certainly a sense amongst political pundits that the move by the Brexit Party is simply not enough to allow the Conservatives a shot at a majority.

Many point out that the Conservatives need to win Labour marginals, which are the seats the Brexit Party still intend to contest.

"It would be much more positive if Farage was to lend a hand in the battle grounds that the Torys hope to take back from Labour as well. However, Farage will announce exactly which seats he will contest on Friday, so given his fickleness so far, things could still yet change," says a note from the JP Morgan currency dealing desk:

"Not a full game changer for us but we will now have more confidence in our buy-on-dips stance," says JP Morgan.

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