Pound / Euro Exchange Rate Forecast: Uptrend to Remain Intact

The United States has come to the rescue of the pound sterling which has suffered against the euro through the final of the past week.

A blow-out jobs report from the United States has prompted a massive US dollar rally in global markets as traders bring forward their assumptions on the first interest rate rise in the US for many years.

One of the winners of the news has been the British pound - a currency that has come under notable pressure over the past 24 hours.

The GBPEUR traded below the 1.40 threshold in the wake of the Bank of England's 'Super Thursday' which saw Governor Carney and his team warn that interest rate rises were still far off owing to a lack of inflationary pressures in the UK.

Why has the pound benefited?

It all boils down to interest rates moves - when rates move higher currencies tend to track higher too.

Latest Pound/Euro Exchange Rates

	Live: 1.1456▲ + 0.11% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1066 - 1.1112
**Independent Specialist	1.1296 - 1.1341 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

In the wake of the unambiguously strong employment figures the US Fed is now likely to raise interest rates in December, January is another prospective date. The point here is that a rate rise is coming and the dollar is tracking higher alongside interest rate yield.

“The October payroll report was very solid and exhibited broad-based strength. It suggests that labor markets have fully rebounded after slowing in August and September,” says Michael Gapen, analyst with Barclays in New York.

Barclays now forecast a federal funds range of 25-50bp in December, up from the current 0-25bp.

The markets believe that a US interest rate rise will open the door to a UK rate rise at the Bank of England which has been - to put it mildly - too scared to jump first.

As such the pound sterling is also edging up against the euro which is faced with the opposite dynamic whereby the European Central Bank is actually looking to cut rates.

This divergence in interest rate expectations has a divergent impact on exchange rates, in this case in sterling's favour.

The US jobs report has allowed the GBP to EUR conversion to retake the 1.40 level having fallen below here earlier in the day.

The solid recovery we are witnessing in the exchange rate leads us to believe that the pair may not reverse lower towards the 1.35-1.38 zone as we had suspected could be the case having witnessed the violent the decline on the 5th of November.

Indeed, the GBPEUR uptrend, in place since October, remains valid.

Looking ahead we will watch price action for a break of the upward-sloping support line to invalidate the uptrend. Note too that the RSI (the bottom line) has corrected and is back below 70 ensuring the instrument is no longer over-bought.

We warned last week that the exchange rate was over-cooked after recent gains and as such backing sterling into the Bank of England meeting on Thursday was always going to be a dangerous game.

Turning the equation around to EURGBP, we see the potential for the euro to lose ground as it failed to take out an important resistance zone:

"Sterling fought back when EUR/GBP failed to take out the 0.72 resistance and eased already before the payrolls release. After the strong payrolls, EUR/USD underperformed cable and EUR/GBP slid further down to trade around 0.7120 currently," notes analyst Piet Lammens with KBC Markets in Brussels.

While it is far too early to call out a full-blown pound sterling recovery we now have the conditions in place for the UK currency to consolidate against its European rival.