Pound in Eye-Watering Declines Against the Euro on First of April

The British pound has collapsed below a key support zone against the euro which sees us now forecasting notably lower conversions.

The GBP/EUR conversion has reached new lows of 1.2495, breaking below the previous 15 month bottom at 1.2579 established on March 24.

A fall in the FTSE 100 index on the first day of April appears to have sparked a fresh decline in the pound.

The FTSE 100 and GBP have been correlated to varying degrees over the course of 2016 and it is worth noting that the FTSE 100's benign performance in March correlated with a firmer pound / euro rate.

The sudden drop of 1.3% seen in the UK's leading stock market index may explain, to a degree, the 0.7% drop in sterling. 

Why would a fall in UK stock markets benefit the euro?

The answer lies with the underlying flows in global capital; the euro is a funding currency meaning it is cheap to borrow and invest in international stock markets.

"Equity funds continue their outflow trend for the eighth week in a row. During this period, the asset class has suffered outflows of $18.6bn. In comparison, high yield and high grade funds have seen combined outflows of only $4.2bn," say Bank of America Merrill Lynch in their latest assessment of Eurozone capital flows.

When stock markets fall that money is returned to its origin, driving up the euro's value.

Latest Pound/Euro Exchange Rates

	Live: 1.1446▲ + 0.03% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1057 - 1.1103
**Independent Specialist	1.1286 - 1.1332 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The Outlook for the Pound Against the Euro

So where next?

Now that the support at 1.25 has been broken the expectation I have is for the pair to fall to a target at 1.2360.

However, because it is April now the monthly pivots have recalculated and the S1 is now situated not far below the range lows at 1.2452.

Monthly pivots are a product of the previous months’ high, low, close and open and traders use them as focal points where prices often change direction.

The S1 monthly pivot is likely to be a tough obstacle to overcome as traders tend to cluster buy orders along it in anticipation the pair will bounce once it touches the level.

Therefore with the pivot so close, we are bearish, but cautiously so as there is a heightened risk the down-move will fail to reach its target.

Manage Your Risk

As sterling faces fresh multi-month lows we reiterate that when it comes to the pound there is only one strategy available to you - risk management.

Holding on for higher exchange rates will always disappoint in the current environment that is dominated by concerns over the EU referendum.

We have suggested those with outstanding euro purchases set their stop-loss levels around the 1.25 area as a break below here invites a sudden decline towards 1.22.

No doubt we will be seeing a number of orders being triggered at current levels as those with outstanding payments see their threshold reached.

There is of course the possibility that sterling bounces off this support area, as was the case in late February and on the 24th of March.

However, sterling continues to trade below the 20 day moving average which is a key signal to us that the bias is for further declines.

Beware a Run on the Pound

Sterling has seen some bright moments over the course of March which may have leant a false sense of security to those with an interest in a higher currency.

In fact, a leading FX analyst told us this week that a run on the pound is one scenario that 2016 could yet offer if the UK votes to leave the European Union.

“A run on the pound is possible if Brexit appears likely. Driven by the uncertainty of economic policy, and trade relations with the EU in what will be a new political environment," says James Stanton at de Vere Group.

Furthermore, yesterday’s announcement of a post-war record current account deficit, at 5.2 per cent of GDP, suggests a worrying dependence on foreigners’ enthusiasm for lending the UK money.

“Should this enthusiasm falter, post-Brexit, either the currency will sink or the Bank of England will have to raise interest rates ‎to protect sterling. Sterling might survive, but higher interest rates risk inducing a recession," says Stanton.

Why is the Euro so Strong?

The euro is moving higher across the board with a notable break against the US dollar occurring too.

This confirms to us that the euro is in control, rather than any sinister British pound weakness sending GBP/EUR lower.

Indeed, the pound has been subject to some decent economic data of late with GDP easily beating expectations on the final day of March confirming the UK economy remains in robust form.

It would appear the 'big issue' on global forex markets is the increased flow of money into the Eurozone.

“Fading expectations for Fed rate hikes and the notion that the ECB may be done cutting rates could see the impact of a divergent policy outlook between the U.S. and the euro zone fade,” says a note from Commonwealth Foreign Exchange.

The promise of higher yields in the United States as the US Fed raises interest rates has long underpinned the USD, now that the Fed looks less likely to pursue agressive rate hikes money is flowing out again.

The euro rose to a five-month peak against the greenback and continues to benefit from a surprisingly dovish Fed this week.

Last week, the dollar rose as a number of US Fed officials signalled that rates would likely rise at least twice this year. Markets begain to believe that the next rate hike could come as early as April.

This week’s cautious comments from Fed Chair Yellen over-rode her more confident subordinates and sent the dollar broadly lower and the euro higher.