GBP/EUR Heading Towards 1.25: Why I am Not Backing GBP This Week
Why I expect the GBP to EUR exchange rate to continue lower over the course of the next 5 days.
The British pound has come under fresh, and sustained attack, in global foreign exchange with traders using the euro to force the currency below key support levels located in the all-important 1.2950-1.30 area.
The problem for a currency that falls below such key support zones is that the selling accelerates. Why?
Big-name hedge funds and bank strategists would have set their exit points on the GBP/EUR below 1.30 (or above 0.7692 in EUR/GBP). Part of the decision making process would rely on the assumption that everyone else would be doing the same thing.
This is exactly what happened when the euro popped above 1.10 against the US dollar; so many strategists were selling the euro at these levels that they placed their stop loss orders just beyond 1.10. When they were triggered we pretty much saw a flood of euro selling as these misplaced strategies were forced to close on unexpectedly poor US economic data.
So with these zones in GBP/EUR now breached there are actually few market orders that will arrest further sterling declines in sight.
Where could the next zone of support for sterling now lie?
"The recent 1.2900 cycle lows are vulnerable to attack again over coming sessions. If breached 1.2750 if not 1.2550 zones will then become readable next," says Lucy Lillicrap, a risk strategist with foreign exchange brokers AFEX.
Latest Pound/Euro Exchange Rates
  | Live: 1.1461▲ + 0.16%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1071 - 1.1117 |
**Independent Specialist | 1.1301 - 1.1346 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
A view of the weekly chart makes it clear why I am not backing the pound over coming days – there is a large head and shoulders along the top, which has breached its neckline.
Last week’s recovery moved was a throw-back to the neckline, before an air-kiss goodbye and a move lower again.
This is a classic move signalling a continuation of the down-trend.
Furthermore, MACD is very bearish on the weekly chart (below), and supports further downside.
The minimum expectation is the 61.8% Fibonacci extension of the height of the H&S at 1.2630, which is also the level of the 200-week MA.
However, the S1 Monthly Pivot at 1.2809 is another strong support level standing in the way, and constitutes the first target to the down-side.
For confirmation of a move to 1.2809, I would wish to see a break below the 1.2893 lows.
Further, a move below the 1.2750 level would probably signal a further move to the eventual target at 1.2630.
Above the daily chart for sterling/euro.
Looking at the calendar we have to wait until Wednesday before we get any domestic numbers to grapple with when industrial and manufacturing production numbers are released.
However, the issue of the EU referendum continues to undermine any potential sterling strength. "Uncertainty about the outcome of the EU referendum may have been a factor weighing on GBP/EUR, which fell towards 1.30," note Lloyds Bank in a currency briefing to clients.
The calendar is quiet today and the focus will be on Fed Chair Yellen’s testimony to Congress starting on Wednesday, as well as the ongoing attention on opinion polls, as PM Cameron drums up support in the EU ahead of the leaders’ summit on 18-19 February.
Fundamentals Argue for Stronger Euro Exchange Rates
With regards to the trend in the GBP to EUR conversion, we should be keeping an eye on the headline EUR to USD conversion.
Unfortunately for those hoping for stronger pound exchange rates the EUR/USD is biased higher. The cross broke the 1.08-1.10 range (now at 1.12 where it is likely to settle into a longer-term sideways trend) that has been of reference since the ECB “under-delivered” in December.
This will likely ensure any strength in the GBP/EUR is capped over coming days; we would want to see EURUSD fail notably as precursor to a sterling recovery.
UniCredit’s FX Strategist Roberto Mialich says fundamentals argue for a higher EUR-USD, BUT, he expects a bumpy road ahead and, in the near term, rallies look likely to be capped.
Capping euro strength is the European Central Bank which is likely to be very uncomfortable with the recent gains made by the euro.
“ECB FX rhetoric looms, especially now that diving equities (Euro STOXX 50 is down 11% YTD), and a higher TW EUR are (partly) offsetting easier financial conditions stemming from lower yields,” says Mialich, ”therefore, in the short term there will be plenty of volatility, but medium-to-long term we see the euro higher.
