Slipping into a Quagmire: Pound / Euro Rate Looks Predictably Rangebound

Expect Pound Sterling to weaken further against the Euro but a recovery is likely to be triggered once the 1.1550-1.16 area is tested. Here is why.

GBP was the second-worst performing currency in the G10 arena in the week ending 16th September.

Only the Canadian Dollar fared worse while the Japanese Yen and US Dollar outperformed their rivals suggesting safe-haven currencies were in demand.

GBP’s August-September rally came to a sudden halt having been decapitated just as it touched the 1.20 area against the Euro.

The currency is now eyeing a test of 1.16 in GBP/EUR while the GBP/USD is on the cusp of breaking 1.30 support.

That Sterling-Euro’s rally failed at 1.20 should come as no surprise - this is simply a big number that traders were targeting as an entry point to press the sell buttons again.

Indeed, the heavy data week that was the 12th-16th September should have seen GBP better supported.

Inflation data was hardly a disaster, UK wage and employment data remain robust and UK retail sales are growing at a clip.

Yet, GBP is turning notably lower.

Driving the weakness were increased bets that the Bank of England would cut interest rates again in November, but there was no marked swing towards such expectations to justify the persistent GBP selling pressure.

Therefore I believe technical considerations are firmly in control of GBP/EUR and GBP/USD.

If we look at the price action in GBP/EUR we can note that bulls fear to tread above 1.20 and bears aren’t comfortable below 1.16:

This state of affairs has been with us since late June and on the face of it we can look forward to more of the same over coming days and weeks.

While it is too early to draw the comparison, one immediately thinks of the EUR/USD exchange rate when asked to name the world’s most mundane currency pair:

As can be seen, this sideways-oriented deadlock has held sway over GBP/EUR since the start of 2015. 

Yet, maybe GBP/EUR, a pair that has brought much excitement over the years could be about to slip into a coma.

“EUR and GBP appear to be stuck in a range for now, with messaging on policy likely to be the most important catalyst,” say Standard Chartered in a recent client note.

On a 2-4 week outlook Standard Chartered say they are neutral on both GBP/USD and EUR/GBP.

Others agree with the idea that range-bound trading is here to stay.

“Growing protectionism and increasing financial market regulation support suggestions that FX markets will remain range-bound with lower implied volatilities,” says Carl Hammer at SEB in Stockholm.

It appears that traders may be happy to play the current range in GBP/EUR through to the Bank of England’s November Quarterly Inflation Report with any changes to monetary policy likely to provide the trigger to a break from recent ranges.

Therefore, we will be watching for Sterling to sink back towards 1.16 ahead of yet another light recovery.

Latest Pound/Euro Exchange Rates

	Live: 1.1453▲ + 0.09% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1064 - 1.1109
**Independent Specialist	1.1293 - 1.1338 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

When the Breakout Comes, it will be Massive

Someone who knows a thing or two about currency market trends is Phil Seaton who runs the LS Trader System.

Essentially, Seaton earns his living by picking and profiting on trends in financial markets.

Seaton has urged traders to exercise patience when it comes to the Euro's inextricable bind with the US Dollar.

"Patience is still required in the currency markets with the knowledge that once we do get a decisive breakout from this seemingly endless consolidation, either up or down, the resultant breakout should be massive," says Seaton.

The dollar index is currently positioned roughly in the middle of a wide trading range and continues to trade around its 50 and 200-day moving averages.

The Euro is in a similar, albeit inverted position.

"The time duration of the consolidation pattern suggests that the eventual breakouts in these markets will result in some very large moves. For now, we wait for the market to point the way," says Seaton.

Speculators Less Bearish on Sterling

There is another reason to believe trade in GBP/EUR will start to settle down.

Sentiment towards the Pound continues to recover with fresh data on the trading community confirming speculators continue to close their negative bets against the currency.

According to the latest CFTC Weekly Sentiment Report, GBP bears covered their gross shorts for a second consecutive week and bulls added to their longs, the combined impact delivering a $0.7bn w/w narrowing in the net short to $6.8bn.

Nevertheless, the imbalance for GBP remains relatively extended, with shorts outnumbering longs 3 to 1.

EUR saw the greatest w/w change, its net short narrowing $1.6bn to $11.4bn as a result of a paring in risk.

In contract terms, the 16.7K decline in gross EUR shorts was the largest w/w drop since early January.

With the extreme positions falling away, so does the opportunity for outsized moves.