The question on everyone’s mind at present is just how far the pound sterling can push its luck against the euro on global foreign exchange markets.
The pound to euro exchange rate (GBP/EUR) has been advancing for the past 5 trading sessions lifting the rate from a floor just below 1.24 ant taking the market to the mid 1.25’s.
How far can this revival extend?
We view any strength in sterling as ultimately short-lived and would agree with those who advocate a ‘sell on strength’ strategy.
A look at the charts gives us a good idea as to how the underlying market is structured, and importantly, how traders are thinking.
We note that the current recovery has allowed the pound to cross above the 20 day moving average - this being the average price of the last 20 days.
A move above the average indicates that the short-term trend has turned positive as a result.
What we know, from price action since December, is that the GBP/EUR does not tend to trade above the 20 day MA for very long.
Of more significance though is that the exchange rate has not closed a single day above the 50 day moving average since the 3rd of December 2015 and with a chronic lack of confidence in sterling owing to the referendum, we do not expect this situation to change.
That is why we would target the GBP’s luck to run out at the 50 day M.A which is presently situated at 1.2714.
Thus, while there is scope for upside, we at least have a good idea of where it could come to an end.
Fundamentals: No Support From the Bank of England
One thing that could swing sentiment towards sterling is an indication that the UK could see higher interest rates in coming months.
However, the Bank of England's April policy meeting passed without incident and cemented the view that no change in policy or tone is likely until after the UK's referendum on EU membership.
The MPC acknowledged an economy growing near trend, but noted that wage pressures remain somewhat subdued.
Perhaps the most important part of the release was the acknowledgement that data would remain choppy over the first half of the year as the referendum has effects on the exchange rate and broader uncertainty (especially for business spending).
The MPC stressed that they would look through noise, meaning this will be a committee that is less data-dependent than normal.
This sounds like an MPC trying to temper expectations of a cut.
While the MPC did hypothesise about possible implications of a UK vote to leave the EU, it will likely continue to shy away from any big policy statements in the two months left before the EU Referendum.