The GBP is under pressure against the EUR and questions are now being asked as to whether the currency pair could ultimately record fresh 2016 lows over coming weeks.
- If you have imminent GBP into EUR payments be aware that sub-1.20 is possible.
- 1.2578/1.2563 will form the focus for this exchange rate over the course of the second week of May
- If the GBP/EUR were to be bid and climb back through 1.2740 then 1.30s become possible
The pound to euro exchange rate fell over the course of the first week of May, coming down from an opening of 1.2738 to close at 1.2647.
The move lower in pound sterling confirms the establishment of a top in the April recovery rally being formed against the euro; no doubt this is partially due to a run of poor economic data releases which confirm the UK economy is no longer growing at a rate that justifies a higher GBP/EUR conversion.
Sterling was kept under pressure as the much-anticipated services PMI out on the 5th of May came in well below expectations at 52.3, analysts had forecast 53.5.
"The PMI provided the opportunity to rebalance exchange rate levels, higher lately than would be compatible with the domestic picture, both in terms of economic data and of political uncertainty ahead of the referendum," notes Asmara Jamaleh at Intesa Sanpaolo in Milan.
The UK economy is certainly seeing its once impressive growth rate decline with much of the blame being placed on deferred investment intentions with the EU referendum taking the blame.
The good news for those who can afford to wait is that the pound should recover quite sharply alongside the economy once the mid-year uncertainty has passed.
Of course, we have a number of weeks lying ahead of us and those with imminent international payment needs will be eager to know whether we are in for further notable slides.
How Far Can the Pound / Euro Rate Fall?
With sterling turning lower the question we ask is where support for the currency pair will be found.
GBP has shown recently that it is quite content to ignore fundamental economic data, be it positive or negative.
The reason for this is sentiment concerning the EU referendum due mid-year is a key driving factor for GBP.
Improved sentiment was noted in April with both betting odds and voter polls pointing to the UK staying in Europe allowing the pound to recover some of its recent losses.
With sentiment being so important we have found technical studies of the structure of the underlying market to be instructive when anticipating moves in this exchange rate.
For instance, we predicted the pound’s failure at the 100 day moving average ahead of the late April capitulation.
CIBC Capitals’s Jeremy Stretch says he is looking for the GBP to EUR conversion to test towards 1.2578/1.2563, “although we would expect to run into some buying interest at such levels.”
However, the pound sterling could fall further suggests analyst Robin Wilkins at Lloyds Bank who now questions whether the 2016 lows towards 1.2320 were in fact the floor for sterling.
A break below 1.2320 would confirm a negative view with 1.1947/1.1933 and then 1.1494 key supports becoming possible.
This technical view marries with those fundamental studies warning of a GBP/EUR decline to parity; note that this is pretty much only compatible with an Out vote being delivered at the referendum.
The Case for Advances
If the GBP/EUR were to be bid and climb back through 1.2740 Wilkins believes there is sufficient evidence to confirm the lows have been put behind us.
Therefore, those with an interest in this market could be best served by sitting back and watching how price action develops.
Wilkins still believe that while above the 1.2255 region the probabilities are for a move back towards 1.33-1.37 in the medium to long-term.
Those with payment needs are therefore urged to ensure their payments provider has relevant stop-loss levels set to trigger should this negative scenario transpire.
Our analyst Joaquin Monfort is bullish on sterling-euro's prospects over coming days having noted that the May decline has now accounted for 50% of the April rally.
If we are indeed witnessing a recovery then the 50% retracement would be where support would be expected to be found ahead of a resumption higher.
"Looked at another way when the pair broke out of a trend-line it was also breaking out of a down-sloping channel, and it is therefore possible to generate a target using the height of the channel extrapolated higher, which gives a target of 1.3164," says Monfort.
A move above the key 1.2930 highs, therefore, could open the way to a move up to 1.3000 initially, and then eventually, probably also the 1.3150 level corresponding to the channel breakout target.