- Trend line continues to support Sterling
- Markets question Bank of England rate cut expectations
- GBP/EUR could remain supported around 1.17 level for a few days
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Pound Sterling has moved back against a key level against the Euro, as bulls fight to keep a multi-month uptrend alive and markets question the sincerity of the Bank of England to deliver on recent warnings that an interest rate cut is needed as soon as January.
The Pound has been sold over recent days as market expectation for a BoE interest rate cut shot up from just 5% last week to over 50% this week. January has seen three members of the Bank's Monetary Policy Committee come out and say they are likely to cut interest rates at the next meeting unless they see survey data in January confirm the economy has indeed started to see growth rates improve in the wake of the December election.
Wednesday has seen this theme cemented by another Bank of England MPC member - Michael Saunders - who has said in a speech in Northern Ireland that it was now possibly the time to cut interest rates to reduce risks of falling inflation. "With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present," said Saunders.
Currencies tend to fall when expectations for a rate cut grow, and this has been true for the Pound in 2020 which has turned its gaze away from politics and Brexit, to focus on economic fundamentals and interest rate policy at the Bank of England.
However, with policy makers at the Bank saying a rate cut will only be delivered on the basis that January's data shows there has been no post-election boost to UK economic growth, it appears markets are willing to wait before they sell the Pound any further. As such, a cessation in selling might be on the cards, and some sideways action could be on the cards.
If the PMI data, due out on January 24, 27 and 28 beats market expectations and comes in on the strong side, the Pound could rediscover its winning ways. The risk-reward of selling Sterling at current levels therefore looks poor, and we could find the currency supported as markets opt to wait to see if the numbers are starting to pick up.
A strong set of PMI figures would likely trigger a recovery in Sterling that ultimately sees the currency reassert itself over the Euro, a scenario that could bring the 1.20 level in GBP/EUR into sight once more.
"We see upside potential for GBP as data stabilise after the reduced political uncertainty. There are few significant scheduled Brexit-related events in the near-term. While BoE Governor Carney struck a dovish tone, we don’t think this has near-term policy implications as the discussion around stimulus was contingent on the economy staying weak," says Hans Redeker, Strategist with Morgan Stanley.
However, technical support appears to be playing a large role in the resilience seen in GBP/EUR.
The Pound-to-Euro exchange rate rose above 1.17 in the mid-week session, having been as low as 1.1633 on Tuesday, albeit the currency is still 1.0% lower over the course of the past week and 2.80% over the course of the past month.
Recent moves confirm short-term momentum favours the Euro, but a technical support line on the charts, that defines the medium-term uptrend, appears to be keeping the GBP/EUR exchange rate supported:
The above shows the Pound has been in an uptrend against the Euro since August, and while the Pound has retraced its rally from December highs above 1.20, the uptrend remains intact from a technical perspective.
We wrote yesterday that a break below the trend line will see us call an end to the uptrend, and start looking for evidence that the Pound has entered into a consolidate phase, or a new downtrend, against the Euro.
"Since August, GBP/EUR has followed an upward sloping trend channel. Since crossing over key moving average trend lines, and seeing them pivot upwards, a case of the “trend is your friend” has paid off. Is that trend coming to an end though? Some key support levels are being tested and economic data tells an interesting story," says George Vessey, Currency Strategist at Western Union. "GBP/EUR is now testing its long-term uptrend support line around €1.1660 and another negative day today risks the pair accelerating lower."
"A bounce looks unlikely at the moment, but topside looks limited all the same. A break could give rise to €1.15 or even a fall towards €1.14, though the latest Reuters poll of FX forecasters reveals the majority of forecasters predict GBP/EUR wont trade below this level over the next six months," Vessey adds.
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