Pound to Euro Momentum is Back but There is One Risk

Pound sterling to euro forecast

The British pound to euro exchange rate (GBP-EUR) looks intent on working its way back to the 1.40 level.

We look for a decline below the 20 day MA as the first signal that would suggest upside momentum is stalling.

At the time of writing the exchange rate is trading at 1.3939 following the release of some positive Bank of England minutes.

We note that the worst of March/April's corrective declines lower may be over for the pair but remain wary that further consolidative side-ways action remains a distinct possibility.

The main upside risk to the euro remains a positive resolution of the Greek debt crisis - something that would be an outright surprise. While this is not currently priced into the markets (note German Bunds) a resolution remains possible and is thus all the more dangerous to complacent euro buyers betting on a better exchange rate.

“In the context of near term EUR performance Greek financing remains a real concern, likely weighing more heavily than any fundamentals impetus. We would argue that scale of political disagreement between Athens and Berlin still remains profound,” says Jeremy Stretch from CIBC.

Also be wary of the Eurozone’s economy putting in some better-than-expected economic data releases as we move into the summer months as the dollop of cash from the ECB kick the cogs into gear.

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Momentum is Positive but Beware a Stall

We are advocating for further gains in sterling-euro at the present time noting a positive Momentum reading on the charts.

Also note that the GBP-EUR charts show the currency pair to be trading above its 100, 50 and 20 day moving averages.

We look for a decline below the 20 day MA as the first signal that would suggest upside momentum is stalling.

This could well occur warns an analysis from Charles Stanley’s Bill McNamara who sees the potential for further consolidation.

Indeed, such weakness would call into question the ability of GBP-EUR to retake the 2015 highs at 1.4200.

Commenting on the outlook, McNamara says:

“The UK currency rose for the second week in a row vs. the euro (following three straight weeks of losses) although its modest 0.33% advance suggests that it is consolidating around the 1.38 level.

“Although the short-term outlook has become somewhat unclear the recent double-bottom at 1.356 or so implies that there should be a degree of support at that level.”

pound against the euro

Data Calendar: the Fundamental Outlook for the British Pound

There is little major data or events expected in the next few sessions and we thus join those commentators suggesting an extended period of consolidation is due.

The UK calendar is relatively bare in the early part of the week, the data highlights come in the form of public finances and retail sales, the latter proving instructive on Thursday.

“Look for ongoing consumer demand, driven by retailer discounting and rising real earnings, to underline positive real economy fundamentals. Prior to such data expect market to closely scrutinise April MPC minutes, not least as the bank are currently in purdah during the pre-election period,” says Stretch.

Should there be any evidence of some BoE members becoming concerned over diminishing spare capacity, allied to discussions of the CPI downtrend proving temporary should provide some GBP support, although of course politics continue to overhang.

CIBC regard the GBP USD spike on Friday as marking the top of the trend, (unfortunately stopping us out of our GBP USD short).

“However, we maintain a near term bias towards a lower EUR GBP, looking for a break of 0.7150/55 to open the way for 0.7090/95,” says Stretch.

Turning the equation around to GBP-EUR 0.7090/95 equates to 1.4104/1.0526.