Pound / Euro Rate Projected to Hit 1.4200 as Uptrend Remains Valid
- Written by: Gary Howes
The British pound to euro exchange rate uptrend is alive despite the sudden spell of GBP weakness seen on Thursday the 5th of November.
The euro appears to be the dominant driver of the GBP to EUR conversion with traders agressively selling the shared currency in anticipation of an interest rate cut at the European Central Bank (ECB).
Most recently, ECB governing council member Erkki Liikanen added to the theme warning of downside risks on the euro zone’s inflation and growth prospects. He added that the governing council is willing and able to act by using all the instruments available within its mandate.
The euro's woes have allowed the pound sterling to recovered from the falls inspired by the Bank of England which suggested they could only raise interest rates in late 2016 due to the a lack of inflation.
The Bank's remit is to maintain inflation around the 2% mark and the present era of low inflation looks set to continue for some time.
Without the support of higher interest rates on the horizon the pound to euro conversion fell from an opening at above 1.42 to end the day below 1.40 prompting fears that the party was over for sterling bulls.
However, there are positives for the GBP. Despite the sharp decline, "technicals are much improved following the prior rebound from 1.3350," notes analyst Lucy Lillicrap at foreign exchange brokerage AFEX.
"Going forwards another examination of 1.4200 remains readable with 1.4425 (July cycle peak) also considered vulnerable eventually," says Lillicrap.
Latest Pound/Euro Exchange Rates
  | Live: 1.1455▲ + 0.1%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1066 - 1.1111 |
**Independent Specialist | 1.1295 - 1.134 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Intervening erosion has buying interest beginning at 1.3890/00 and more substantial support toward 1.3775.
The message from Bill McNamara at Charles Stanley is that we should not expect any significant advances by pound anytime soon owing to the fact that the UK interest rate outlook has become so unclear.
"The pound is going to struggle to maintain its recent upside momentum, at least in the near term, and a return to its summer highs, at around 1.44, is unlikely to occur any time soon," says McNamara.
We wrote last week however that the British pound could find upside buying interest against the euro intact.
Our forecast rested on the observation that the uptrend remained valid at the time of writing:
This remains to be the case but the coming days will determine whether this assumption remains valid.
The GBP must defend the 1.40 support line which roughly coincides with the bottom of the rising channel and where the 100 day moving average line rests.
A break below 1.40 this week would suggest that we are going to witness some longer-term consolidation that would likely see the GBP to EUR conversion close out the year around the 1.40 marker.
