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Euro buyers secured a one-year best in midweek trade, and further gains depend on France delivering new bad news.
The Pound to Euro exchange rate struck its best level for euro buyers in a year during midweek trade, and the next leg higher now depends on a fresh deterioration in France's fiscal setup.
Today, the pair trades at 1.1784, holding just below that high after repeated pushes above 1.18 were sold, leaving long upper wicks on the daily chart.
The Relative Strength Index (RSI), a momentum gauge where readings above 70 mark an overbought market, peaked above that threshold this week and has turned lower to 69.
The pair sits 0.8% above its 21-day moving average at 1.1687, the widest gap since the mid-July peak near 1.1820 that preceded a two-month retreat towards 1.1650.
Above: GBP/EUR at daily intervals with the 21-day moving average and RSI.
The euro's weakness has done the heavy lifting, with French fiscal stress pushing the gap between French and German ten-year borrowing costs, the favoured measure of French stress, to its highest since 2011.
A fresh leg higher in GBP/EUR needs that stress to intensify, and the Paris political calendar offers no immediate trigger.
Turning to the French government, its immediate test is a no-confidence motion over the budget, which it can survive if either of the two largest opposition blocs sits on its hands.
"If either the Socialists or NR abstains, the government and budget are likely to survive, as we also expect the centre-right Republicans (LR) not to back a no-confidence motion," says a morning note from Danske Bank, the Scandinavian investment bank.
ABN AMRO this week argued the worst of the euro's decline has passed.
What It Means for Euro Buyers
Current levels are the best for euro buyers in a year, and the technical setup argues against banking on a straight-line extension.
A consolidation would first target 1.1750, last week's breakout level, ahead of 1.17 and the 21-day average near 1.1690.
Our house view is that the pound stays capped into the 28 October Budget and recovers afterwards, which favours any dip towards the 21-day average being bought.
A daily close above the July peak at 1.1820 would need France to supply the catalyst; until then, 1.1750 is the more likely next stop.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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