The aggressive multi-month fall of the British pound may be reaching its conclusion according to technical studies which confirm the recovery seen over recent weeks may have some staying power.
- Only a break above 0.7831/67 removes the prospect of downside risks - Credit Suisse
- Only a break beyond 0.81/0.8150 will lead to a larger up move - Societe Generale
- However, ForexTell reckon EUR/GBP weakness should be bought ahead of a broader recovery
The euro has started the new month on a decent note with the euro to pound sterling exchange rate pair (EUR/GBP) managing to hold onto the strong gains recorded in the dying days of April.
A perspective of time is always key when forecasting currencies and taking a step back shows that the British pound's Trade Weighted Index (TWI is a broad measure of the key £ exchange rates) has been in decline since the summer of last year.
The GBP's move lower accelerated in 2016 as the EU referendum date was set and markets started to ensure their risk exposure to the event was minimised.
However, in early May technical studies suggest the decline in the broader GBP TWI may be over.
Analyst Christopher Hine at Credit Suisse says the decline has fulfilled his core bear target at 84.30/83.80 – "the top of the multi-year base stretching back to 2009 and the 61.8% retracement of the 2013/15 rise, where solid support has been found."
With sterling downside now seemingly having reached its limit, we can read a potential end to the corresponding appreciation in the EUR/GBP.
EURGBP has seen a sharp rise having formed a base in the 0.6934-0.6982 area:
The formation of this base has allowed Hine to construct a recovery target, based on principals inherent in technical analysis.
Studies conducted by Hine had him set a core recovery target at 0.8009/96 – the series of highs seen at the end of 2014 and the 61.8% retracement of the 2008/15 bear market.
A ceiling was found ahead of medium-term trendline resistance from 2008 now at 0.8160.
Forecasting the Next Moves
So where will the euro / British pound exchange rate move from here.
The pound continues its recovery as traders buy the currency on the basis that their concerns surrounding a UK exit from Europe may have been over-exagerated.
The recovery in GBP is forecast to now target key resistance at the March 2016 86.09 high.
“We would expect selling to show here, but if overcome this would establish a larger base and signal a more durable recovery to target the 38.2% retracement of the 2015/16 fall at 87.21 next,” says Hine.
A bigger barrier is seen at 88.34/58, which Hine expects to provide a ceiling.
Support moves to 84.73 with a break below 82.96 needed to turn the trend lower again for 81.00.
The euro to pound sterling exchange rate is forecast to decline in response to GBP’s continued recovery.
“The sharp break lower from here has seen a top complete below 0.7867/31 and we now target support at 0.7684/53. – the 38.2% retracement of the November 2015/April 2016 rise,” says Hine.
The Credit Suisse analyst expects an effort to base in this area.
“However, should it be directly removed this would set a larger top and open up a retest of basing/price support at 0.7526/0.7494. With the rising 200-day average approaching just below at 0.7743 we would look for an attempt to find a floor here,” says Hine.
Resistance moves to 0.7831/67 – the trendline from December 2015, 55-day average and price resistance.
Only a move above here will ease the immediate downside risks, and above 0.7995 to turn the trend higher again to retest the 0.8118 peak.
Technical Analyst Tanmay Purohit at Societe Generale agrees with Hine’s assessment noting some heavy technical challenges facing the euro.
“EUR/GBP has faced stiff resistance at multiyear descending channel near 0.81/0.8150, also 61.8% retracement since 2013. With monthly indicator near resistance, only a break beyond 0.81/0.8150 will lead to a larger up move,” says Purohit.
Short term, the Soc Gen analyst notes that EUR/GBP has fallen below its upward channel and a test of 0.7650 looks likely.
The Contrarian: Buy Euro Weakness
Professional trader Sean Lee at ForexTell believes the euro should continue rising.
Lee confirmed to his trading community that he was entering small 'long' positions on EUR/GBP in anticipation of a recovery.
His call has proven correct and in a mid-week note he confirms he is looking to buy any weakness in the pair going forward:
"My initial target at .7910/20 has been reached. I expect to see some consolidation around these levels with the possibility of a dip back towards .7850 before the up-move gathers more momentum."