Euro Exchange Rate Complex Coming Under Pressure as Spectre of Brexit Spreads Across the Channel

The euro has lost ground on a combination of unimpressive economic data of late and a new phenomenon - the contagion of Brexit-inspired negativity to the Eurozone. 

Analysts are now starting to wake up to the possibility that a Brexit could cause considerable fall-out for Europe, the euro and possibly even global risk trends.

"The spectre of Brexit has also opened up a pandora's box of fears about the the European Union itself. Although it appears to be extremely difficult to legally break the Maastricht treaty, should Britain actually decide to do so it could open the way to full Eurozone fracture," says Boris Schlossberg, analyst at BK Asset Management.

Little wonder then that euro has been drifting lower against the US dollar alongside with the pound as investors grow increasingly wary of the whole region.

David Cameron’s rather desperate attempts to win more concessions for the U.K at last week’s summit may have seemed a much-ado-about-nothing – but retrospectively they may be viewed as the last-ditch attempt by a British Prime minister to salvage – not just the UK’s place in Europe, but also the entire European dream.

Detrimental to the Eurozone, Could Invite Strong ECB Reaction

Societe Generale’s Kit Juckes argues that if Britons vote to leave the EU, other EU country’s might follow suit, leading to a slow-down in growth and political instability in the euro-area:

“Brexit, however, isn't just bad for the UK. It would have negative growth implications for the rest of Europe, and more importantly could cause wider political uncertainty.”

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.

 

Juckes goes on to say that a worsening outlook for the euro-area could result in a more aggressive policy response from the ECB:

“So far, the response to any market signs of loss of confidence in the Euro Area has come from the ECB and that isn't likely to change.”

“That in turn, is negative for the Euro, which this morning is sitting just above key psychological support at EUR/USD 1.10 and above the bottom of the uptrend of the last few months at 1.0950 or so.”

“I suspect that a break of 1.10 will see an acceleration downwards for EUR/USD.”

Barclays, have also argued that investors are misjudging the impact of a Brexit on the breadth of its potential impact as a broader European or global risk.

Analysts at Barclays go onto argue that:

“Immigration is set to be the key ‘wildcard’ driving the referendum’s likely outcome and, with procedural constraints, timing. Because immigration also is the top political issue in the rest of the EU, and a UK exit would set an unwelcome precedent, the EU referendum is at least as big a risk to EU and EMU stability as it is to the UK economy; ie, the clue is in the name.”

Implications for the Euro's Outlook

In the short-term the impact of a Brexit on GBP/EUR is likely to be further downside as the pound depreciates in the immediate aftermath of the referendum, and the euro may gain on risk-aversion.

What would happen next would depend on how the event affected the political landscape in the euro-zone.

If it triggered copycat demands for referendums in other countries in the EU, which is Barclays’s base expectation, then that could lead to instability and send the euro lower in the medium to long-term, leading to an appreciation in GBP/EUR. 

Indeed the U.K might be viewed as somewhere of “relative safety” compared to an “uncertain euro-zone” leading to an appreciation of the pound to the euro.

HSBC say Euro Won't Suffer

Suggesting that the euro is likely to remain bouyant in the wake of a UK exit from the Eurozone are HSBC, who as we observe here, have released an undoubtedly negative assessment of a post-Brexit UK economy.

In fact HSBC are euro-bulls and forecast the EUR/USD will end 2016 at 1.20 and mention little risk of contagion risk presented by Brexit.

"While such an event might create some market concerns about further exits from the EU and Eurozone, we think this would not be reflected as starkly in the EUR compared to the fall out for the GBP. The Eurozone also enjoys a current account surplus, making it less vulnerable to short-term financing squeezes than the UK," says Dominic Bunning, FX Strategist at HSBC.

Sterling Vulnerable from Technical Approach

A technical view of the pair suggests it has reached short-term support at roughly the level of the 200-week MA and is currently consolidating there.

The pair has also reached the minimum target generated from the head and shoulders reversal pattern at the highs, at 1.2700.

As in our previous forecast, we see the dominant trend as most probably extending lower, with a break clearly below 1.2500 probably indicating an extension to 1.2310.

Looking at the pair from the other angle, the euro is favoured while over 0.7765 the technical bias is for a break-up through 0.79, opening a further extension into more important long-term resistance in the 0.80-0.82 region.

"To start to alleviate pressure on sterling, we would need to see a decline back through key supports lying at 0.7765, 0.7655 and then 0.7450," says Robin Wilkin, an FX analyst with Lloyds Bank.

Wilkin argues such a decline would suggest we are moving back into a range-trading environment, similar to that which we saw all of last year over key support at 0.70/0.69