GBP/EUR Rate Recovery Still Alive Thanks to Close Above 1.29

The GBP to EUR conversion ended the week on a solid footing, recovering the steep falls suffered following the ECB's March policy meeting.

The past week has seen the pound and euro trade within a tight range with either side refusing to give an inch as traders decided to wait to hear what policy changes the European Central Bank would introduce in their March policy meeting. 

We warned that a break was coming and our expectations for a solid set of EUR-negative interest rate cuts had us expecting the break to be higher.

A move higher is what Thursday's much anticipated ECB event delivered, to start with at least.

Mario Draghi added a further €20 billion to the monthly QE budget along with lowering rates, introducing a second version of TLRTOs and allowing corporate debt to be used as part of its portfolio of investments.

"Having learned some harsh lessons back in December, the ECB was never going to underwhelm the markets and has thrown the book at the problem," says Alastair McCaig at IG.

Initial action was negative for the EUR with this convincing show of intent by the ECB seeing the pound to euro break above the 50 day moving average and resistance at 1.30.

However, the move was capped by the 50 day moving average in a sign of just how biased against the pound market positioning has been for the past two months.

This is an incredibly tough level to crack it would seem as there is a wall of sell orders set up around this level.

We have been reporting quite extensively of late as to why a break above 1.30 is key for this pair's outlook.

Euro Strengthens Considerably

However, gains in the GBP to EUR conversion were swiftly capped, and then some, during the ECB press conference where ECB President Mario Draghi offered no hint of further action down the line.

"Before too much congratulatory backslapping could take place in Brussels, the ECB president managed to trip himself up in the following press Q&A session," notes McCaig.

Draghi really needed to hint on being open to further action to maintain the initial euro losses sparked by the initial rate cut.

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.

 

The euro surged higher across the board as Draghi said cutting interest rates ever further into negative territory was a more or less futile line of policy to follow.

Markets have read this as being the end of the ECB's rate cutting adventure.

The Pound Needed a Solid End to the Week to Maintain Confidence

The reaction in the pound to euro exchange rate to Draghi's comments was notable with the pair crashing below its trusty support level at 1.2850.

Those looking for better GBP/EUR exchange rates needed the pair to break back above 1.2850 to send the message that the late-February / early-March recovery is still alive.

Markets deemed the euro's post-ECB rally to be something of an overreaction and spent Friday shedding exposure to the currency as a result.

The pound strengthened by more than we expected, taking1.2850 and then some. 

If this level had not been achieved then sterling ran the real risk of being pushed back to 2016 lows at around 1.26 where we would expect notable support to be found.

The crux of the euro's predicament was summed up by CitiFX in which they claim the euro's sharp rally was an overreaction.

"There is no denying that the ECB has over-delivered on the stimulus front and the medium term outlook is now a firm ‘sell on rallies’ to levels approaching 1.1300," say Citi, "EUR and euro rates appear to have significantly overreacted to selective parts of the ECB commentary."

Citi suggest much of this overreaction appears to be positioning based given markets were pricing further rate cuts of - 11bps beyond -0.40% by year end and markets were heavily invested in negative bets against the euro heading into the ECB event. 

As such the rally quickly snowballed as traders were forced to close bets, just as was the case in December when the euro shot notably higher.