GBP/EUR Exchange Rate Capitulates
The move higher in the GBP/EUR exchange rate at the start of the week has been confirmed as a false break.
The pound to euro exchange rate (GBPEUR) has traded a well-defined range for much of late August / September, much to the frustration of those with euro-based payments.
1.36 has tended to form the lower boundary beyond which selling pressure evaporates while gains are unable to extend beyond 1.38.
This action confirms to us that fair value lies somewhere between these big figures - why would the currency move anywhere else?
There were signs that this dynamic was changing on Monday the 21st of September when talk out of the ECB allowed the GBP/EUR to power higher and break above 1.38.
In the process momentum turned positive on the British pound and gave hints that the market was about to escape the late summer doldrums.
Those with large outstanding euro payments will have however been frustrated by the subsequent capitulation – 1.38 resistance appears to have struck again and we are back in familiar ranges at the time of writing.
A leading retail currency payments specialist has told us business is slow as there are an unusually higher number of orders sitting at the 1.40 level waiting to be triggered on any strength - the waiting gain continues for now.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Can the 1.40 Level be Hit Again?
We get the sense that if the pound sterling is to break out of its present quagmire against the euro it will be to the upside.
It is not just sterling-euro that is moving sideways notes Lucy Lillicrap at currency specialists AFEX:
“So far as EUR/USD & GBP /USD are concerned enough compression already exists to enable a significant range break-out in due course but both pairings appear comfortable tracking sideways at present.
“This has obviously kept the GBP/EUR cross pinned within a relatively narrow range over recent weeks and indeed an extension beneath 1.3500 or beyond 1.3900 is required to indicate any new directional bias here.”
There is little near-term excitement for the British pound to be had but we do note risks to the euro are growing.
The euro exchange rate complex came under significant pressure in 2014/2015 as the ECB embarked on its extraordinary quantitative easing programme.
The programme should end in 2016 and foreign exchange markets have priced the euro accordingly.
Should we get a hint that the programme will be enlarged and extended this could spell weakness for the shared currency as markets will have to factor in a substantially larger flow of extra currency into the market.
Over recent days we have heard rumblings out of the ECB that such a move could be on the cards and those watching the currency markets are becoming increasingly tetchy on the issue.
ECB Vice President Vitor Constancio has said the ECB has scope to buy more assets as its quantitative easing has been small compared to similar schemes elsewhere,
"The total amount that we have purchased represents 5.3 percent of the GDP (gross domestic product) of the euro area, whereas what the Fed has done represents almost 25 percent of the U.S. GDP, what the Bank of Japan has done represents 64 percent of the Japanese GDP and what the U.K. has done 21 percent of the UK’s GDP," Constancio told Reuters in an interview.
Markets continue to look for EURUSD to gradually decline back towards the lows set earlier this year around 1.0450.
The recent strong UK data should meanwhile keep the GBP in out-performance mode and as such we expect the pound sterling to edge back towards the 1.40 level.
