Pound / Euro Rate: At an Important Cross-Roads
The pound to euro exchange rate is at an important point in its evolution - the next two days will determine whether the recent recovery will continue.
January was not a good month for sterling and its 3.8% decline against the euro concluded its worst two-month decline since 2008.
Over the past 365 days we have seen GBP/EUR fall from a best exchange rate at 1.4415 to 1.3134 today - this is a decline of 8.89%.
However, of late the exchange rate has recovered back above 1.32. Many are asking us at Pound Sterling Live whether now is the time to buy euros with sterling or to wait for better levels.
This question comes at an interesting time in the evolution of the pair's recovery, look at the chart:
What we are witnessing is the short-term uptrend meeting the longer-term downtrend. If the longer-term trend is to hold sway, as is usually preferred by technical traders, then a turn lower should now happen.
However, if the a base has been formed and a recovery is building then a break of this descending line must now take place. Should it happen then we would be much more confident in calling a stronger pound sterling over the course of February.
We will give this story two days to resolve. This brings us neatly to the most important fundamental event on the British pound's calendar - Super Thursday at the Bank of England where traders will get a good idea of whether interest rate expectations will indeed support a stronger GBP.
Latest Pound/Euro Exchange Rates
  | Live: 1.145▲ + 0.06%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1061 - 1.1107 |
**Independent Specialist | 1.129 - 1.1336 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Bank of England’s Super-Thursday is Key Risk
Make no doubt that the key event of the week - and month - will be “Super Thursday”, when the Bank of England’s interest rate meeting, coincides with the release of the minutes from that meeting and the quarterly Inflation Report. There is also a press-conference with Mark Carney.
The timing of potential interest rate rises at the Bank of England remains central to the British pound’s outlook - GBP has suffered heavily in January as markets got the message that the Bank was looking to delay raising rates into 2017.
Currently the expectations of a rate hike being announced this February are virtually zero.
According to Fixed Income Analysts at Bank of America Merrill Lynch Global Research the inflation report is expected to be dovish, and therefore could on sterling:
“We expect a dovish QIR (Quarterly Inflation Report) in the UK and see lower growth & near-term inflation BoE forecasts.
“The front-end has flattened and we do not see the QIR as catalyst for reversal.”
That said, with sentiment surrounding interest rate policy being so biased against sterling at present there is the distinct chance that we could see GBP move higher on positive utterances.
Brexit Remains a Concern for Sterling
The main concerns for sterling traders over the medium term are Brexit fears and for the technically inclined these are reflected by the giant head-and-shoulders pattern bearing down on the weekly chart.
We continue to watch this topic as it presents a longer-term threat to the GBP and report on the latest views forwarded by leading institutions accordingly.
There are increasing signs that PM Cameron has struck a deal supporting the sovereignty of Britain within the EU.
This deal could potentially be announced on February 18-19 at the EU Summit, allowing the government to prepare a referendum to be held before the summer break.
Scottish school holidays start in late June; hence, the options market has positioned for the referendum being held on Thursday, June 23.
