Euro to Pound Rate is Likely to Fall Warn ING
Strategists at ING say they see the balance of risks starting to point to the downside for the EURGBP.
The strategic recommendation by ING comes amidst a fresh turn lower in the euro to pound sterling exchange rate (EURGBP).
In mid-week trade the exchange rate has fallen from the 0.74 resistance line back towards the mid 0.73's - could this be the trigger to a resumption of euro weakness?
This will come as a relief to those hoping for a stronger British pound as the euro has risen steadily over recent weeks, recovering from a low of 0.6950 in August to maximise at 0.7443 in October.
ING are part of that camp of strategists advocating for a strategic sell of the EUR/GBP pair in anticipation of the longer-term downtrend ultimately resuming from these apparently overbought levels.
However, we note the uptrend in EURGBP remains valid from a momentum perspective with the exchange rate trading above its 20, 50 and 100 day moving averages on the daily charts. We look for a break below the 20 day moving average at 0.7346 to signal a more sutained break lower.
Latest Pound/Euro Exchange Rates
  | Live: 1.1459▲ + 0.14%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1069 - 1.1115 |
**Independent Specialist | 1.1299 - 1.1344 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Fundamentally there also exists a strong case to sell the pound in the short-term. "Sterling’s rough patch continues as the post-payrolls dovish Fed re-pricing has negatively spilled over into BoE rate hike expectations," says Chris Turner at ING in London.
Turner says the recent wave of GBP selling has been driven by the widening gap between the expected timing of the first Fed and BoE rate hike (ie, moves at the very short-end of the curve), rather than a material deterioration in the UK economic outlook.
ING believe political risk is also playing a role in keeping the British pound exchange rate complex under pressure; this week’s annual Conservative Party conference may hint at a potential date for the EU referendum.
The British Pound Should Recover
While Brexit concerns may keep sentiment soft, ING think that GBP stands to gain the most from a pick-up in the global risk environment.
"With our economists still looking for a BoE liftoff in Feb-16, we suspect that external MPC members voting for a rate hike in 4Q15 will serve as a catalyst for a bearish flattening of UK rate curves (and hence support for GBP)," says Turner.
Short EUR/GBP positions look attractive to ING strategists – "a 1M put spread now captures next month's 'Super Thursday' MPC meeting (05 Nov), which should see at least one more MPC member (Weale) voting for a rate hike. We target a move below 0.72."
The tactical short on the euro to pound conversion echoes a similar strategy held at BNP Paribas who confirmed:
"We see significant scope for further EURGBP downside, and enter a short EURGBP spot position at 0.7395, targeting 0.7000 with a stop-loss of 0.7510."
