GBP/EUR Rate's Consolidation Finally Under Way, Forecasting Resumption of Upside

At the start of the new week, and just ahead of the turn of the month, the British pound is seen correcting from overbought conditions against the euro confirming our belief that some healthy ‘down time’ is needed to settle the market.

The GBP to EUR exchange rate has rallied in impressive fashion through the course of May with the pick-up seen since the 16th May really shifting momentum into GBP’s favour ahead of June.

A raft of technical signals are now advocating for further gains and cementing the credentials of the rally.

We have however raised concerns as to the overbought nature of GBP/EUR following the move higher noting that the rally must at some point pause.

When asking such a question we turn to the Relative Strength Index (RSI) for guidance. The RSI is a trend signal that gives readings between 100 and 0. Importantly, a reading of 70 and above is taken as a sign that a trend is overbought in nature.

Last week we saw the RSI hit 71 on the GBP/EUR chart and historical studies have shown that the reading never resides at such levels for long.

The late April rally saw the RSI approach 70, and on hitting the level the pair fell back from 1.2850 and consolidated just above 1.26.

However, in March 2015 the RSI hit a high of 83 which confirms that the reading can climb yet higher and the pound therefore can endure longer spells of overbought conditions.

Above: The GBP/EUR chart showing the overbought conditions signalled via the RSI in the bottom pane.

That said, we would expect the pair to consolidate at the present time as we don’t believe the pre-referendum polling will continue to show an unstoppable surge towards the Remain vote.

Furthermore, the short-covering that has defined the recent recover in the British pound will surely run out of market space and traders will once again have to turn to fundamentals to seek justification for further buying action.

We don’t see this as being available at present.

Matthew Ashley, FX Research Analyst for Blackwell Global, says ultimately the EUR has been weakening for some time but the GBPEUR is unlikely to break above 1.33 resistance in the short-term.

“Consequently, we will probably have to wait for the GBPEUR to retrace before it surges once again,” says Ashley.

Latest Pound/Euro Exchange Rates

	Live: 1.1449▲ + 0.05% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.106 - 1.1106
**Independent Specialist	1.1289 - 1.1335 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Analyst Views Concerning the British Pound / Euro Outlook

We bring a selection of the latest views pertaining to the GBP/EUR from those foreign exchange analysts we regularly follow.

(Note that the analysis below was conducted on EUR/GBP, therefore we have flipped the numbers and tone to GBP/EUR).

• SEB:

"Positioning data for GBP still sends an overly dovish signal given the fast decreasing probability for Brexit. In the run up to the referendum we think there is more upside potential in the pound on additional short covering."

• Robin Wilkin at Lloyds Bank:

“We have extended the reversal from 1.2903-1.2853 support to test channel resistance in the 1.3227/1.3245 region, with last years range lows around 1.33 just above.

“Intra-day studies are overbought and suggest another fall from this area is possible, but such a move is likely to be limited to 1.3072-1.3004 support.
       
“Longer-term we have cited 1.2346-1.2195 as a major support region and price action continues to suggest 1.2320 was a bottom for a move back towards 1.3698-1.2888.”

• CitiFX:

“An inverse head and shoulders formation seen yesterday with a neckline at 1.4650 (weekly close) on GBPUSD would suggest further gains to month-end next week though taking a more medium term view until the June 23rd EU referendum, the better technical picture is probably more a cue to continue to buy sterling on crosses rather than against USD.

“With the GBPEUR cross having now opened up a move to 1.3245 - the 50% retracement of the entire Nov’15 high – April’16 low (1.4325-1.2315).