The euro has fallen sharply lower against the pound sterling following the monthly policy decision at the European Central Bank (ECB).
The EUR to GBP conversion fell sharply following the October ECB press conference where ECB Predident Draghi said there are still concerns over China and emerging markets and a degree of accommodation will need to be re-examined at the December meeting.
The conversion was seen trading at 0.7256 on the news - markets were guessing such news would be forthcoming but the confirmation has encouraged an acceleration in selling pressure.
Technically, the EURGBP reached a high of 0.7463 on the 11th of October and has since fallen confirming 0.74 to be the effective resistance point to further advances.
Commenting on the outlook in the wake of recent ECB action is Karen Jones at Commerzbank:
"EUR/GBP has sold off aggressively and has sold off to the 0.7198 September low.
"Following the markets recent rejection from .7492 and we continue to view that as an interim top. We are bearish and once below .7198 we shall consider that the market is on track for .6937 July low (favoured).
"We do have a 13 count on the 240 minute chart and would allow for a rebound to .7250/95 ahead of further weakness.
"Major resistance continues to be seen at .7535/42 (this is the location of the previous 43 year uptrend, which should now act as resistance and the 2013-2015 downtrend). We will maintain our bearish view while capped here."
Draghi Signals a Weaker Outlook for the Euro
Draghi said the governing council had a 'rich discussion' on various policy tools including a further cut in the deposit rate from the current level of -0.2%.
Draghi once again reiterated that the bank is ready to act if necessary and is open to use all tools to achieve its mandate.
The President said the downside risks are due to the output gap, low inflation due to further fall in the energy prices, a slowdown in the EMS and an almost 8% appreciation in the EUR exchange rate.
Richard Cochinos, Head G10 FX Strategist with Citigroup says the ECB hit all the spots when it comes to promoting euro weakness:
1. An explicit signal on QE: Confirming market expectations
2. An indication that the ECB is not “waiting and seeing”, but already acting on it already (“working and assessing” in Draghi’s words)
3. Making clear that the 20bps deposit floor is now a variable – he has said this explicitly
4. Discussion of FX and stressing the importance in EUR recovery
"President Draghi and the ECB appear to have used all four of these, and EUR has reacted accordingly. Draghi has been as dovish as he could be without actually doing something," says Cochinos.
Bottom line: EUR negative. EUR rallies will continue to be sold at Citi.
Analysts were universal in their agreement that while further easing is coming, this month is too early.
From a longer term perspective, global markets struggle to assess the health of the global economy and its impact on monetary policy.
Watch moves in the euro v dollar exchange rate for direction in euro v pound sterling as caps in advances in the EURUSD tend to coincide with caps in EURGBP.
"The pound’s trend against the euro seems slightly less balanced: important movements of the EUR/USD exchange rate, especially on the upside, tend to prove persistent, keeping the EUR/GBP cross rate closer to the upper end of the 0.70-0.75 range," says Luca Mezzomo with Intesa Sanpaolo in Milan.
The 1.1460/95 resistance in EURUSD has been tested unsuccessfully and it looks as though the topside in EUR/USD is protected.
We read this as confirmation that 0.74 as a credible cap in EURGBP.