GBP/EUR Exchange Rate Waits for a 'Black Swan' Event to Push Higher
The British pound has fallen sharply against the euro this week but there are reasons for sterling's backers to remain positive.
The GBP to EUR exchange rate has fallen from a high at 1.43 at the start of the week to the mid 1.41's mid-week representing a potential cap to near-term upside pressures.
Doubts over sterling’s ability to press higher have grown of late.
“There has been something unconvincing about the GBP in recent weeks and I feel that the big bull run, which has lasted now for 30 months, may be about to end,” says independent professional trader Sean Lee with Forextell.
Lee says he has no idea what possible “black swan event” might send the pound tumbling, “but my radar has been pinged and I’m looking to trade from the short side.”
The longer-term picture however remains positive as there is nothing on the long-term charts to suggest that a major turn-around is occuring, for now at least.
We do agree with Lee that something significant will be needed to push the pound to euro exchange rate above the 1.43-1.44 resistance line.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
What Will Sterling’s Black Swan Event Be?
UniCredit Bank in Milan have come out with a briefing in which they back further strength in pound sterling.
“However, a catalyst is needed to kick-start the process,” says Dr. Vasileios Gkionakis, Head of Global FX Strategy, “In our view there are three potential catalysts.”
The three are:
1) The BoE turning less dovish.
2) The market starting to realize the mispricing of the lift-off gap (between the Fed and the BoE) and its consequent complacency on the pricing of the BoE hiking cycle.
3) Data (and more importantly inflation) surprising on the upside.
It is worth pointing out that all three points are actually related – nevertheless for UniCredit the clincher will be point number three with inflation data, in particular, being the decider.
“As we move into 2016 and the negative base effects in headline inflation fade (unless, of course, oil keeps plummeting), inflation will pick up sharply,” says Gkionakis, “wage growth effects will then start to surface, setting the stage for an earlier BoE lift-off than is currently priced in.”
Nevertheless, the pound’s high-point against the euro will occur around March of 2016 with a level of 1.51 being forecast.
The timing of this high-water mark coincides with the views held at Lloyds Bank; we have reported the British bank are seeing 1.45 being their maximum forecast for March 2016.
Most analysts we have heard from reckon the lion’s share of GBP appreciation will occur in the lead up to the first interest rate rise of the upcoming cycle.
But there is more to the story, and that is stronger growth in the Eurozone.
Eurozone GDP Seen Higher, Could Boost EUR
The ECB is likely to cut interest rates again in December, a move that will likely maintain the euro exchange rate’s present downside momentum.
But, Eurozone growth is not expected to be all that bad.
“In the eurozone, the GDP recovery is set to reach an above-consensus 1.9% in 2016, mainly thanks to the impulse of domestic demand. A strengthening of the labor market and a moderately expansionary fiscal policy will support the acceleration,” says UniCredit’s Chief Economist Marco Valli from Milan.
However, a gradual recovery of global trade will be essential to keep sequential growth close to an annualized 2% amid fading tailwind from euro depreciation and from lower oil prices.
If the Eurozone economy can steadily improve then we could well see the theme of 2016 move from ECB easing to ECB tightening.
If markets start to talk about, and price in, interest rate rises at the ECB then the euro could well move notably higher in 2016.
GBP to EUR Could Hit 1.47
From a technical approach, it resistance to any GBP/EUR strength is located at 1.44.
Sterling gains here could be tested in coming sessions "but given that re-emergent weakness continues to prove corrective only from a long term perspective any fresh set-back is again likely to prove unsustainable," says Lucy Lillicrap, a currency risk manager with Associated Foreign Exchange.
Support begins at 1.4190/00 and studies argue an extension through 1.4050 secondary demand would be necessary to signal an interim top has been posted already.
"Otherwise once the market has re-based a foray toward 1.4600 and thereafter 1.4725 looks plausible as this up-leg continues," says Lillicrap.
