The Euro to Pound Rate is Rising Again, Just as These Guys Predicted
- Written by: Gary Howes
The euro is advancing against the pound sterling once more, just as longer-term studies suggested it would. The question now is how far will the move extend?
The euro to pound sterling exchange rate has been in the ascendency since early December 2015 and analysts tell us that the scope for further advances remains preferred.
Longer-term chart studies confirm a slew of indicators are advocating for further gains by the euro which has built up a head of steam.
However, nothing ever moves in a perfectly straight line and currency market action since late January has turned in favour of the British pound.
Triggering the move higher by the UK currency has been a run of positive PMI data released in early February.
However, the all-important Bank of England super-Thursday event, when the latest growth and inflation forecasts are released by the Bank, did not allow sterling to hold its recent advantage as downgrades to economic forecasts were announced.
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.
Technical Strategists Favour Further Euro Gains
However, we must ask ourself whether the recent strength in sterling is sustainable or whether the euro will ultimately exert upside pressure again.
After achieving crucial support at 0.70/0.68, EUR/GBP has embarked on a recovery. The pair confirmed a double bottom and breached above a descending channel.
“It has achieved our target of 0.7750. Larger rebound is likely however, short term, a pause is not ruled out. 0.75/0.7450 should be an important support,” says a technical forecast note from Societe Generale.
Much of technical forecasting evolves around the mantra that 'the trend is your friend' - in other words don't fight the momentum.
“After breaking out of the 0.6900-.7500 range that has developed over the last year or so, the trend is still up,” says Robin Wilkin at Lloyds Bank.
Key support in this regard lies in the 0.7480/40 region.
“We are biased to still look for a correction back into this support zone before a return to the trend, with a decline through that support and then 0.7400 negating the short-term bull trend and returning the market to the precious range environment,” says Wilkin.
While over key supports a break of 0.7680 and then 0.7755 sees return to the trend say Lloyds with next resistance lying in the 0.80 region, with long-term resistance lying at 0.8260.
ING Favours the Pound in February
While the trend appears to favour the euro over sterling the fundamental argument for a move higher in EURGBP appears less clear.
The cloud of a potential British split from Europe has negatively shaped investor sentiment towards sterling of late.
But, the tide on the Brexit debate may actually now be shifting in favour of sterling.
“Latest Brexit developments and the release of a draft EU deal means that a small window of opportunity may be open for clients looking to capitalise on a near-term GBP correction,” says Viraj Patel, Foreign Exchange Strategist at ING.
ING see four compelling reasons for holding a 1M strategic short EUR/GBP position:
1.Near-term Brexit-related newsflow may prove to be GBP positive, not negative.
2.The BoE will look to firmly avoid the Brexit elephant in the room
3.Difficult to see the risk environment in Feb being as bad as Jan.
4.Lead up to Mar ECB meeting will on balance be EUR negative.
Strategically speaking, Patel says:
“We now see sufficient reasons for a near-term EUR/GBP correction lower, with scope for a move down towards 0.7370 (1M target). An indicative spot trade (entry: 0.7605; stop: 0.7680) would generate a 3:1 profit:loss ratio. Given the risk of a Draghi disappointment, we would advise clients to close any positions ahead of the 10 Mar ECB meeting.”
Bank of England Triggers Fresh Bout of Pound Selling
The pound has exhibited volatility in the run-up to the weekend despite the Bank of England announcing no change in policy, as widely expected.
GBP/USD and GBP/EUR initially fell below 1.4540 and 1.30, respectively, after MPC member Ian McCafferty, who had previously voted for a rate rise, switched sides and joined the majority.
The Bank also revised down its growth and inflation forecasts.
"Sterling subsequently recovered, as Governor Mark Carney played down the likelihood of a cut in interest rates, saying that the next move is likely to be higher, even if the inclination towards near-term tightening has diminished," note Lloyds Bank in the wake of the Bank of England event.
We expect the noise presented by such events to now fade and the longer-term trends to re-establish.
