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Pound to Euro Rate's Decline Can Extend into the Late 1.17s say Analysts

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The British Pound has been under pressure against the Euro for a number of days now and analysts tell us the near-term picture should see further downside, although a more protracted decline still remains unlikely.

Although the Pound has remained relatively steady against the Dollar over recent days it has fallen 0.30% against the Euro this week, adding to last week's 0.45% fall.

The Pound to Euro exchange rate (GBP/EUR) fell two-thirds of a percent on August 04 alone following the Bank of England rate decision.

However, much of this week's losses appear related to outright Euro strength with the headline Euro-Dollar exchange rate is up two-thirds of a percent this week at 1.0240.

In fact a look at the Euro's relative performance shows it to be the best performing G10 currency on August 09:

Euro outperformance

The Euro-Pound exchange rate (EUR/GBP) has risen accordingly, going to its highest level since July 26 at 0.8457.

Technical Analyst David Sneddon says Tuesday's close above 0.8440 in EUR/GBP should allow the Euro's "recovery to extend
further with resistance next seen at 0.8493/96".

This translates into a near-term extension in the decline of GBP/EUR to 1.1774/1.1770.

The British Pound had rallied through the course of July against both the Euro and Dollar, but the August 04 Bank of England interest rate hike and the release of dire economic forecasts sent the UK currency into reverse.

GBP to EUR daily chart

Above: GBP/EUR at daily intervals.

The forecasts showed the Bank of England expects the UK economy to enter a protracted recession, starting at year-end.

In fact, there will be no meaningful growth for the remainder of the outlook period, which goes through to 2025, according to the Bank's economists.

The predictions are understandably unhelpful for the UK currency, but it is worth noting the selloff is relatively constrained, all else considered.

In fact, Pound-Dollar closed August 04 higher than where it started and is 40 pips lower at the time of writing five days later.

Analyst Chris Turner at ING Bank says "Sterling probably has not sold off more since investors do not quite know what to do with a reserve currency that will be backed by rates at 2.25% if we are correct with our BoE call for the September meeting."

Turner, who heads ING's Global Head of Markets for the UK and CEE, says he still thinks the Euro should remain soft.

"We are sticking with our original call from last Thursday that EUR/GBP may struggle to break above the 0.8450 area this week," said Turner on Monday.

EUR/GBP at 0.8450 gives a GBP/EUR of 1.1834. (Set your FX rate alert here).


Above: EUR/GBP at daily intervals.

This level was however broken on Tuesday and Turner acknowledges further Euro strength can now follow.

"We had felt that this might prove the top of a near-term trading range – despite the Bank of England's bleak prognosis last week. In our mind, there still does not seem a compelling case for EUR/GBP to trade substantially higher, but we acknowledge that a break of 0.8450 can carry EUR/GBP to the 0.8485/8500 area," he says.

EUR/GBP at 0.8485/8500 implies a move lower in GBP/EUR to 1.1785 and 1.1765.