GBP/EUR Rally at a Critical Crossroad
The GBP longer-term trend against the euro still remains relevant despite a challening August - October period.
The GBP appears to have arrest declines following the release of better-than-expected employment and wage figures out of the UK.
Those looking for a more sustained improvement in the GBP/EUR’s situation will however have to be patient as we require further such data events to convince markets it is time to start backing the UK currency once more.
If we are to obey the notion that ‘the trend is your friend’ and observe the idiom of how futile it is to ‘swim against the tide’ the following graph tells us a story:
Momentum clearly favours the euro at the present time and we see little reason to pick a bottom in the GBP/EUR noting the channel is titled to the downside.
Some would argue that we need to step back and look at the bigger picture - that the trend higher in the sterling / euro since 2013 should ultimately favour a resumption in the pound’s rally.
However, even in observing the monthly chart we note that there are warning signals concerning the GBP’s outlook:
The above shows us that the multi-year uptrend has gotten ‘messy’ in 2015 as what was a clean channel leading into the start of the year erupted to the upside and has since fallen sharply lower.
Interestingly it could be argued that the current declines actually reinforce the longer-term uptrend pre-2015 by taking us where we should be had the initial rate of accent been maintained.
Either way, the pound to euro conversion is at a cross-roads as we are at the bottom of the upward sloping channel.
The pound will need to bounce higher or will at risk of negating the longer-term technical move higher.
This is where fundamentals step into the picture. The current juncture for sterling/euro equates to a key moment for the Bank of England which is seen to be on the cusp of raising interest rates.
We feel that should, in coming weeks, the case for a March/April rate hike be made more solid the pound could pick up on its journey higher.
Latest Pound/Euro Exchange Rates
  | Live: 1.1446▲ + 0.03%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1057 - 1.1103 |
**Independent Specialist | 1.1286 - 1.1332 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Pound Could Deteriorate Further
Analyst Bill McNamara from Charles Stanley notes that further losses in GBP/EUR are possible.
In a technical forecast McNamara notes the pair has lately been stuck at the low end of a congestion band (where support has been kicking in at around 1.345).
Further deterioration cannot be ruled out at this stage:
"The chart shows that this level also corresponds to a 50% retracement of the rally that began ten months ago, a fact that strengthens its importance as a backstop.
"That said, the short-term outlook could still deteriorate further and the chart is now suggesting that sterling could ease back to test the next retracement level (i.e. 61.8%) before too long, which implies a downside target of approximately 1.32."
