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Pound's Rally vs Euro Could be a Case of Too Fast, Too Soon Warn Exchange Rate Market Analysts

The pound to euro exchange rate (GBP/EUR) put in an astonishing advance at the start of the new week but a friendly reminder to traders and those with impending foreign exchange payments - the referendum is yet to take place.

Pound to euro exchange rate forecast

"Traders betting the farm on a sterling rally happening on Friday should remember just how wrong polls were at the last General Election and just how far the pound could drop if Britain votes out." - Joe Rundle @ ETX Capital.

Traders not wanting to miss out on the Bremain rally in GBP have pushed GBP/EUR right to the cusp of 1.30, nearly 2% higher than where it commenced Monday's trade.

This was a massive move by historical standards and when added to the gains seen at the end of the previous week we have witnessed a move resembling the impressive recovery seen in mid-May.

"Given the EU referendum is an unprecedented event, one might expect traders to be cautious and take money off the table. That certainly wasn't the case with Monday's trading," says Adam Jepsen at Financial Spreads.

It appears traders are content with the huge swing back in favour of Remain on the betting markets.

Betting market Betfair has confirmed there is now a 78% chance the UK will vote to stay in Europe, a great improvement on the 58% seen last week.

Betfair odds go the way of Remain

Nevertheless, we must warn against complacency as this entire saga has proven that the only certainty is uncertainty.

"The GBP strengthened as new polls came in, but uncertainty will remain prior to the vote. Most of the polls report 10-15% undecided voters, which means these undecided voters as well as the participation rate will have a great impact on the final turnout," says a brief from Sweden's SEB Bank released today.

Therefore, don't be surprised if sterling takes a dive between here and the release of results.

"These FX moves are but a taste of the volatility we expect to see this week. In the event of a Brexit, our expectations are for an immediate drop in Sterling of around 10% against the US Dollar and a 5% rally if ‘remain’ wins, with Sterling moves against the Euro of -8% and 4% respectively," says Enrique Diaz-Alvarez at Ebury Partners in London.

Latest Pound/Euro Exchange Rates

United-Kingdom European-sUnion
Live:

1.1685▼ -0.02%

12 Month Best:

1.1801

*Your Bank's Retail Rate

 

1.1288 - 1.1334

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Positive Sentiment Could be Misguided

The Remain campaign had a positive weekend but the vote on Thursday is far from a foregone conclusion warns Financial Spreads' Jepsen who cites the following reasons to stay cautious:

  • The polls are still fairly well balanced albeit favouring Remain
  • The "don't knows" often account for 5-15% of vote and could easily shift the balance
  • It's plausible that Leave campaigners are more motivated and therefore more likely to vote
  • Younger voters seem to favour Europe while older voters are more inclined to Leave - yet older voters are more likely to actually cast a vote
  • A number of newspapers are firmly in the Leave camp and they could still influence some Remain voters as well as those who are undecided

"The current risk-on sentiment could well be misguided," says Jepsen.

Joe Rundle, Head of Trading at ETX Capital shares this view noting "investors are rolling the dice on Britain choosing to remain part of the EU but there is still plenty of opportunity to get burned."

The polls are close with the 50/50 split that has acted as a fulcrum over recent weeks remaining being in place. 

There is still a chance of a Brexit, despite the swing towards the In camp over the last few days.

Theres is certainly a risk that Remain voters will believe the job is already done, and not bother to turn up at the polling station on Thursday.

It has been said that Leave voters are the more motivated and will almost certainly be out in full force.

"Traders betting the farm on a sterling rally happening on Friday should remember just how wrong polls were at the last General Election and just how far the pound could drop if Britain votes out," says Rundle.

While the polls are close, the odds paint a different picture. We’ve lengthened the odds of a Leave vote on our Brexit market, with a roughly 75% probability that Remain will triumph.

"But it’s far from over – there is still huge uncertainty for the markets and the City over the coming days as support for the Leave is holding up and could rally further,” says Rundle.

Goldman Sachs: Buy GBP Against EUR on Bremain, Target 1.42

If voters decide that the UK should continue to be a member of the European Union, Goldman Sachs have told clients they would anticipate a strong appreciation of Sterling, which is also implicitly assumed in the Bank of England's May Inflation Report.

For all G10 currencies, in the event of a Remain vote our recent FX forecasts would remain our base case.

Tactically, it is argued by analyst Silvia Ardagna, EUR/USD would likely see a decent upside move in response to a Remain vote, and contrary to our directional bullish view on the USD.

After the latest FOMC meeting, Goldman Sachs' economists adjusted the subjective probabilities for a rate increase at the next two meetings, lowering July to 25% (from 35%) and raising September to 40% (from 35%).

"Although the probability we assign to a Fed hike in July remains higher than that priced by the fed funds future market, it is unlikely that investors will reprice such probability significantly to the upside, at least until the next US employment report, which will be released on July 8," says Ardagna.

However, the EUR should weaken versus Sterling.

"When EUR/GBP stood at 0.76, we quantified the 'Brexit' risk premium at around 5-8 big figures. Since then, EUR/GBP has moved up almost another 3 big figures. Hence, in a 'Remain' scenario, EUR/GBP could move sharply towards our 12-month forecast of 0.70," says Ardagna.

0.70 EUR/GBP is 1.4286.

This bullish outlook falls in line with research from Lloyds Commercial Banking and Nordea, which has pointed to the probability of further upside in the exchange rate over the next 3-6-month horizon, and a move above 1.30 to perhaps as high as 1.35.

Technical Forecast: Further GBP/EUR Gains to 1.30 Handle

The pound to euro exchnage rate gapped up at the start of the week and is currently close to the monthly pivot at around the 1.2900 level, however, the fact there has been a gap higher suggests there will probably be more upside.

There is a strong possibility that a clear move above the monthly pivot would indicate a further continuation up to the key 1.3000 handle.

Expect the exchange rate to pause at this level as there does appear to be a good supply of sterling around here, as evidenced by the halt to gains seen on Tuesday.

Beyond 1.30, the next obvious target is 1.32 which forms the May highs.

GBPEURJun20

Another technical sign there could be more upside comes from viewing the move down from the 1.44 highs in July last year as a type of pattern called an Elliot Wave.

An Elliot Wave analysis would suggest the move up from the 1.23 April lows had not completed - at least in length of time, as it is unlikely to be surpassed in length.

It will only have completed after the MACD - on a special 4,31 setting used to analyse Elliot Waves - has moved above the zero line -  which is has not yet done.

This analysis would suggest the possibility of the next move being up, to retouch the 1.32 May highs.

GBPEURJune17wk

The Remain Bounce is Already Happening

Overwhelmingly, the most important event in the week ahead is the UK referendum on Thursday June 23.

The market reaction at the start of the week is telling - GBP is being siphoned up by traders who appear fearful that if they don't enter the market now they will miss out on any bounce that would emnate from a Remain victory.

"The Remain camp is gaining traction; therefore, the market has switched to risk-on mode with investors buying the pound sterling, the euro and equities, while dumping gold and the Japanese yen," says Yann Quelenn, market analyst with Swissquote Bank.

A Bloomberg composite poll indicates a 45% to 42% lead for Remain.

We have noted on many occassions that analysts are forecasting excessive volatility when the results of the EU referendum are released.

"Our sterling view remains that GBP/USD would bounce to 1.50 on a ‘Remain' and fall towards 1.30 in a ‘Leave' vote, a pretty symmetric reaction initially. Longer-term, we'd sell 1.50 and sell into any bounce after the initial GBP/USD fall on a Leave," says Kit Juckes, currency strategist with Societe Generale.

With regards to the euro, Juckes expects EUR/UDSD to fall to around 1.06 on Leave and to bounce to around 1.20 on a Remain.

"As with the pound, our bias once the dust settled would be to sell the Euro," says Juckes.

While the pound sterling is forecast to decline on the event of a Leave vote, we note here, that there is a possibility that it could actually surge higher within days of such an outcome as markets start to price in the implications for the future of the Eurozone of such an event.

Take Advantage of Today's Rates

Many readers have contacted us enquiring about whether or not now is the time to exchange their hard-earned cash for foreign exchange.

When it comes to foreign exchange risk management is key and the question to ask is not whether the rate could be better, but whether it could be worse.

On balance, we have seen a good portion of the recovery rally already take place and the risks to the downside grow.

The answer is therefore obvious - now is as good a time as any.

 

 

 

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