Finally, the GBP to EUR conversion ended the week higher than where it started - is this a sign of a steadily improving outlook for the UK currency?
- British Pound to euro exchange rate today: 1.1730, last week's best rate: 1.1784
- GBP/EUR opened the week at 1.1531 and closed at 1.1740
- Euro to Pound Sterling rate today: 0.8524, last week's best rate: 0.8680
- EUR/GBP opened the week at 0.8672 and closed at 0.8524
The British Pound has finally put an end to its downtrend, which started in mid July.
We have just seen the first weekly advance in Sterling against the Euro in five weeks.
This in itself is a sign that immediate-term pressures may be easing.
The news out of the UK economy over the past two weeks has been better than markets had anticipated:
- UK inflationary pressures are building
- Employment rates and wages are rising
- Retail sales are rising
- Business investment is rising (scroll down for more)
There has also been a great deal of technically-inspired trading taking place. With negative bets against Sterling remaining near historical highs, the market is far too heavily biased towards the downside.
With every man and his dog betting against Sterling even the slightest counter-trend move can trip the market up.
This creates a domino style toppling over of these negative bets - as traders are forced to close their positions on account of the counter move, so the GBP is bid higher.
Therefore, we can find quite a bit of guidance from the charts in this regard.
Trapped by the Technicals
Big clues regarding the outlook for GBP/EUR can be read in the charts.
Right now we are particularly interested to see whether support at the 20 day moving average on the daily chart will hold.
Right now the 20 day moving average is down at 1.1650 and has the ability to halt any declines we believe:
Above: GBP/EUR looks for support from the 20 day MA on the daily charts, designated by the green line. Image: IG.com, PoundSterlingLive.com
GBP/EUR closed safely above the 20 day M.A, ensuring our call for a sideways consolidation pattern, with a slight downside bias, remains intact.
We say downward bias as the 20 day M.A is pointed downwards, so even a close day above the 20 day can point ensure the trajectory is lower.
To the topside we see the 50 day moving average which could well thwart any strength with a solid line of sellers expected to lie here.
For proof of what a barrier the 50 day M.A can be, just look at how the GBP/CAD pair has been capped by this ceiling for three days on the trot.
Will it be the same for Sterling-Euro? Until September's data starts to be made available, we believe it could well be the case.
GBP/EUR's 8 Year Uptrend is Over: Societe Generale
We have set out our stall, but what do institutional analysts make of Sterling's recent rally, and do they believe it can last?
Strategists at Societe Generale say the recent rally in GBP/EUR was overdue and in the short-term the bank is looking for a move towards 1.2048/1.2121 as being possible.
Therefore don’t be surprised if the current move higher has further to run.
However the 1 to 3 month view helpd by the bank suggests the move lower is likely to extend.
Analyst Stéphanie Aymes notes that GBP/EUR has broken below the 8-year channel (1.2346/1.25) and says the GBP/EUR has signalled a completion of a multi-year uptrend.
Above: Mutli-year uptrend in GBP/EUR breaks down. Picture: IG.com, PoundSterlingLive.com
The recovery bounce seen following the worst of the Brexit sell-off ran into a brick wall of resistance at the 1.2121/1.2195 levels, ensuring that Sterling remains unable to break out of the gravitational pull of the longer-term decline.
“It has achieved our advocated target at 1.1495/1.1429,” says Aymes.
1.1337 will be the next target Aymes aims for.
The picture here confirms that the strength we have seen over recent days is likely to be technical in nature while fundamentaly the currency remains exposed to the downside.
The Other Side of the Dime: Long-Term Decline Coming to an End
Just to muddy the waters a little for our readers, where Aymes sees the end of Sterling’s multi-year advance against the Euro, analyst Robin Wilkin at Lloyds Bank argues this Brexit-inspired decline from the July 2015 highs is coming to an end.
The market has remained strong through first line resistance and Lloyds are focussed on the more important resistance levels in the 1.1834/1.1869 region.
Further strength through here would suggest the bottom Wilkin is looking for is in place for at least an advance back towards 1.25/1.3158 again.
Key pivot support lies at 1.1655 - i.e if it stays above here gains are likely, if it breaks below here expect the down move to extend. (Remember we see 1.1662 as being a key support.)
A move back through here would suggest a run at 1.1363 is still on the cards in the opinion of Lloyds’ technical strategist.
Long term, in conjunction with their GBPUSD view Lloyds believe this move to the bottom side is the last within the correction from the 1.4285/1.45 resistance region which was hit in the summer of 2015.
Lloyds do acknowledge that they have no sign of a bottom developing as yet though, with a move above the 1.15 region seeing little in the way of meaningful resistance till the 1.11/1.08 region.
Business Investment Data Supports Sterling
The final major data release of August is in, and like the majority of releases seen through the month it confirms the Brexit vote wasn't the armageddon that many had anticipated.
"As Summer draws to a close UK data continues to stifle the scaremongers and those previously in the Remain camp as UK GDP printed a solid 0.6% growth for Q2 this morning," says Alex Lydall, Senior Sales Trader at Foenix Partners.
The data does not cover the period following the referendum but does confirm, "that the whole ‘debacle’ perhaps wasn’t as bad as previously thought around the month of June," says Lydall.
Of note were the strong Business Investment figures for the UK in August which read at 0.5%, much better than the forecast -0.8%.
Furthermore, the ONS reported that inflation and employment data particularly pleasing and a bullish Services sector for the immediate aftermath in July.
"Initial fears appear to be subsiding in the marketplace, with the key now being any rhetoric around timing of when Article 50 will be triggered. The short term has been weathered, but the medium to long term are potentially a different picture," says Lydall.
Fortunes of the EUR/USD Will be Important for Broader EUR Complex
How the Euro, in general, trades will also be key to the Sterling-Euro story going forward.
In short, if the EUR/USD suffers a deeper decline there could be a good chance that we see the Pound remain supported.
And for now, it would seem the Euro does face growing downside pressures.
"The euro is unable to sustainably hold above the uptrend in place since December 2015. After having levelled off around the trendline at 1.1320 for some days now, it fell sharply yesterday," notes Ralf Umlauf at Helaba Bank in Frankfurt.
Moreover, the indicators are giving off some weakening signals.
"If the 1.1223/33 zone is broken to the downside, the to-date positive outlook would deteriorate. Our favoured trading," says Umlauf.
However it must be noted that EUR/USD does tend to tread a tight range and Helabe are looking for EUR weakness to be contained at 1.1180.