Why the EUR to GBP Rate is on the Cusp of a Fresh Fall
- Written by: Gary Howes
The euro to pound sterling exchange rate (EUR/GBP) has is holding ground after recent sharp declines, however relief may be temporary with studies suggesting the pair could be about to commence a longer-term decline.
'The trend is your friend' is the mantra of many a monentum trader - the idea being that you have more chance of winning on a directional bet than on a bet that tries to pick a turnaround.
With that in mind, it is time to take a step back and identify the trends being forced on the EUR/GBP pair.
A look at a key chart would suggest the euro should turn lower from here:
The above monthly chart for EUR/GBP, that comes courtesy of Commerzbank's technical analysis department, shows that sterling has held the advantage since 2008.
It has pushed the EUR/GBP into a downward sloping channel, the EUR/GBP advance seen in 2016 is a mere bounce within this channel.
If the long-term technical bias of the market remains intact, then sterling should start to struggle on meeting the upper limit of the slope.
While some will say a Remain victory in the EU referendum will ensure the upper limit is defended, it is also worth arguing the line will be defended even on a Brexit.
After all, it’s not just the UK that would be impacted by a Remain/Brexit outcome.
Brexit will surely trigger speculation as to whether other countries might start questioning their EU membership.
For instance, Kristian Thulesen-Dahl of the Danish People’s Party has already said that he thinks Denmark should exit too if the British vote to leave the EU.
A Reuters poll at the beginning of May suggested a number of countries including France, Germany, Italy, Spain and Belgium would like their own referendums with one third of the 6000 people polled saying they would vote to leave the EU if given the chance.
June 26th is the date for the Spanish election and the summer months could well see another migration crisis.
The Eurozone is still in deflation and Europe is showing no signs of changing its structure – fiscal or otherwise.
"When you also consider that the UK is the second largest economy in the EU and contributes 9% of its budget a Leave vote is like to be as detrimental to the Euro as it is to Sterling the long run," notes Lucy Lillicrap, an analyst with AFEX Markets Plc.
Nevertheless, in the short-term, it may still be too soon to suggest the euro has completely rolled over from its 2016 period of appreciation.
The pair, “will need to go sub 0.7736 (26th April low on a closing basis) to alleviate upside pressure,” says Karen Jones, an analyst with Commerzbank.
Jones says she remains unable to rule out a retest of nearby resistance which lies at 0.7998 noting this is the last defence for the 0.8116 April peak.
Those wondering where the euro may commence a fight-back should watch nearby support at 0.7736 which is the 26th April low - often currency pairs bounce off such levels of support.
Latest Pound/Euro Exchange Rates
  | Live: 1.1451▲ + 0.07%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1062 - 1.1107 |
**Independent Specialist | 1.1291 - 1.1336 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Fundamental Analysts see EUR/GBP Lower into Year-End
Once the EU referendum is out of the way expect the markets to quickly shift focus to the Bank of England where expectations of future interest rate rises will be key.
The promise of higher rates would likely boost the pound, while any signs that Bank is keen on kicking the date into the future will likely keep the GBP pressured.
The good news is that despite the uncertainty posed by the EU referendum, the UK economy boasts solid economic development and an improving labour market.
This should ultimately sway the hand of the Bank to bring forward an interest rate rise, something that should favoured the GBP.
“We think the market is still under-pricing the timing and pace of Bank of England rate hikes. We expect the central bank to start hiking in 2017, but tightening will be limited,” say analysts at DNB Markets who have this week released their latest longer-term forecasts for the British pound against the euro.
DNB Markets are forecasting the euro to trade at 0.75 against the pound in one month’s time, rising to 0.76 in three months.
The pair are forecast to end 2016 at 0.74.
Consensus forecasts, as per the latest polling of all the major institutional researchers, show the majority are forecasting EUR/GBP to trade at 0.77 in one month, 0.76 in three months and and 0.74 in 12 months.
