The Pound May Have Finally Found a Temporary Floor Against the Euro

The GBP to EUR conversion rate could move above 1.30 in April with some analysts even forecasting 1.34 if certain hurdles are crossed.

• Pound to euro exchange rate appears stuck around a pivot at 1.2750 for now
• "With monthly indicators near a floor, only a break below 1.25/1.2346 will lead to a further decline." - Societe Generale.
• DNB Markets forecasting a recovery in the exchange rate towards 1.38 in 12 months

Pound sterling has been hands-down the worst performer among G10 currencies this year and based on this form it is quite difficult to get excited about the currency's prospects moving forward.

The underperformance in sterling is quite stark, with the pound to euro exchange rate falling from levels above 1.42 in November down to 1.26 in March.

Long-term, the decline from the 1.4420 highs set in July 2015 remain intact and only a decisive break above the 1.3063/1.3423 resistance area would see us entertain a more sustained uptrend that would take us back to the best levels witnessed in 2014. 

We believe this to be a hard task in this age of Brexit, and our technical analyst Joaquin Monfort writes here that the next 'big move' will likely be lower.

Nevertheless, there is no denying that the frantic selling that characterised the start of 2016 has come to an end; GBP may be forming a base. 

Studies would suggest that 1.26 is acting as a floor on the declines which while not turning me bullish on sterling’s prospects it does suggest some meaningful rebounds are possible.

It has been the nature of the positive trade since mid-February that has many in the analyst industry talking about a move higher over coming weeks.

Head of Technical Analysis at Societe Generale, Stéphanie Aymes, notes the euro’s ability to press new highs against sterling is diminished:

“The decline in GBP/EUR, after testing key resistance at 1.4285/1.4706, appears to be facing stiff support at a multiyear channel at 1.25/1.2346.

“With monthly indicators near a floor, only a break below 1.25/1.2346 will lead to a further decline.”

Near-term, Aymes says a retracement towards 1.2987 and even to last May lows at 1.33/1.3422 can’t be ruled out.

Latest Pound/Euro Exchange Rates

	Live: 1.1451▲ + 0.07% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1062 - 1.1107
**Independent Specialist	1.1291 - 1.1336 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The Euro is Losing Momentum

GBP/EUR’s new low of 1.2586 has been accompanied by a divergence of the daily RSI, which tells us the euro is losing downside momentum. 

This does not bode well for the prospect of further euro strength argues Karen Jones at Commerzbank.

Jones says the market is stuck above the 200 week moving average at 1.2605. We have seen in the past that selling pressure tends to stop at such a hefty moving average as many in the market will be placing buy orders here in anticipation of a rebound.

According to Commerzbank's research advances in GBP/EUR will however be contained by resistance at the four month downtrend line and the 55 day moving average at 1.2866/1.2909.

A successful move above the resistance posed by the 55 day moving average, as referenced by Jones, could trigger more gains to the 1.3219 are which corresponds with a 38.2% retracement and the 1.3285 February highs.

Jones says she is however, in the longer-term, unable to rule out a move to target 1.2453 / 1.2399 as this is the measurement lower from the ceiling at 1.3347 - 1.4415 and where the September low was made.

Further Losses Going Forward Warn AFEX

Lucy Lillicrap at Associated Foreign Exchange (AFEX) concurs with the view held at Soc Gen and Commerzbank noting some of the previous downside impetus has dissipated as prices approach psychological support at 1.2500. 

"While this bearish momentum can still be regained - on an accelerated sell-off for example - the market otherwise appears content to pivot 1.2750 or so for now as previous declines are digested," says Lillicrap.

To reduce negative risk appreciably Lillicrap argues values would need to hurdle at least secondary resistance in the 1.2850 area as well, thereby bringing 1.3000 back into focus within the context of a broader corrective pattern.

Otherwise further losses look likely going forward suggests the AFEX analyst.

DNB Forecasting the Pound to Rise Above 1.30 on Bank of England

DNB Markets are meanwhile warning that markets are overly negative on the British pound’s outlook, from a fundamental perspective.

In a note to clients DNB, Norway’s largest bank, say a solid economic backdrop in the UK should see the Bank of England increase interest rates faster than currency markets presently expect.

Interest rates matter, as a rule of thumb countries with higher interest rates command higher currencies as global investor demand for higher yield ensures money moves into these countries.

So rising UK interest rates would tend to attract currency inflows as investors look to take advantage of improved yield.

This BoE-inspired demand for sterling is likely to pick up argue DNB and they are forecasting the pound to euro exchange rate to hit 1.3158 in three months before heading to 1.38 in 12 months.

“We think the market is under-pricing the timing and pace of Bank of England rate hikes. We expect the central bank to start hiking in November. Leading up to this we expect to see interest rate expectations pick up and a stronger GBP leading up to this,” says a note from DNB on the matter.