Euro Exchange Rate Outlook for the New Week

Will the euro to pound sterling exchange rate retain a heavy bias or will the single currency force consolidation around present levels?

Central banks are arguably the single most important driver of currency direction in the current climate with those looking to cut interest rates and print money pushing their currencies lower.

Meanwhile central banks like the US Fed and Bank of England are looking to raise interest rates soon, placing upward pressure on their own currencies.

The ECB warned this month that it may cut interest rates again, this has created downward pressure on the euro.

With big central bank moves on the horizon strategists at the various research houses we follow are frantically updating their projections, for instance Danske Bank suggests that a floor may be found as early as 0.71.

It is important to differentiate between the long-term and short-term timeframes as forecasts in the latter are likely to be the most accurate.

Technical strategist Karen Jones at Commerzbank is looking to sell the EURGBP conversion with a target at 0.6950.

Commenting on the strategy Jones says:

“EUR/GBP charted an inside day and we suspect may consolidate very near term in an attempt to absorb recent losses.

“Overall it continues to weigh on the downside following its strong rejection from the 200 day ma at 0.7245. Intraday rallies are indicated to be likely to fail 0.7200/30. Our overall outlook stays negative and we target the 0.6937 July low and the 38.2% retracement of the move from 1971 at 0.6915.

“Major resistance continues to be seen at 0.7518/42 (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.”

Above: EURGBP chart courtesy of Commerzbank.

The euro has stabilised heading into the close of October, putting a tentative end to the period of weakness driven by October 22nd’s dovish European Central Bank statement.

“I do expect to see further losses in the near future and will be looking for signs such as a bearish engulfing for the selloff to continue,” says Joshua Mahony at IG.

For now, the price is attempting to break through £0.7168 resistance, which points towards further short-term gains.

“However, I prefer to await another sell signal to move with the trend rather than a riskier countertrend strategy,” suggests Mahony.

GBP Strength to Return

The British pound has been somewhat of a laggard against other major currencies over recent weeks as markets have priced out chances of near-term UK rate hikes.

But strength is returning as interest rate expectations shift back in favour of the UK unit.

TD Securities say they believe weakness will prove temporary as the BoE will follow the Fed and raise rates in the first half of next year.

“We think GBP will outperform against the EUR and some commodity crosses, particularly versus CAD and NZD. For now we remain tactically neutral,” say TD Securities.