GBP/EUR Forecast: A-B-C Correction Completes, Further Gains Possible
The US Federal Reserve's September interest rate decision could well trigger the recovery in the Pound to Euro exchange rate our studies anticipate.
- British Pound to Euro exchange rate today (20/9/16): 1.1627, September's best rate: 1.20
- Euro to Pound Sterling exchange rate today: 0.8602, September's best rate: 0.8583
GBP is maintaining a tight range against the EUR as markets await the US Federal Reserve's interest rate decision.
Volatility across foreign exchange markets has fallen as markets play it safe ahead of the decision. While no change is forecast, should the Fed surprise markets with a rate rise stock markets will likely come under notable pressure.
At present Sterling's performance is tied to that of stock markets - when markets are higher so too is the Pound. Therefore, any surprise by the Fed could impact negatively on GBP/EUR.
If the Fed keeps rates on hold we believe Sterling should edge higher.
“In light of expectation that this global downturn in global sentiment is temporary, I still do think that the GBP, the riskiest among G4, should firm more. It is still possible that the BoE gets a positive surprise by November. And it strikes me too that we have seen some divergence with its key recent drivers," says Aurelija Augulyte at Nordea Markets.
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.
A-B-C Correction Lower Nears Completion
The GBP/EUR pair hit a multi-week best at 1.20 one week ago but promptly fell back confirming to us that this is a currency pair that is highly dependent on technical levels for guidance.
When a trend turns at a big rounded number such as this it is surely not a mere matter of coincidence.
We have noted here that an identifiable sideways range is establishing and as such falls back towards 1.1450 cannot be ruled out over coming days.
Further studies have identified the formation of an a-b-c correction lower; this offers us clues as to potential future moves:
If the A-B-C pattern is complete, then the recent weakness could well have simply been a correction lower within the recovery witnessed over the mid-August to early-September period.
Therefore, the weakness may have ended and we might see the rate begin to rise back up towards the 1.2006 highs again.
Although tough resistance from the 50-day MA at 1.1800 now lies in the way. This could well limit any strength that grows over coming days.
But, for those with international payments that fall over coming weeks look for a break above 1.2006.
This would reignite the possibility the pair might be reversing and going higher, after it formed what looked like a double bottom at the lows.
Such a move would be expected to reach an initial target at 1.2120, where the R1 monthly pivot sits.
Pivots are levels of support and resistance which impede trending markets and can sometimes also lead to reversals.
Alternatively, a break below the 1.1690 level would confirm an extension lower, down to a target at the 1.1450-1.1500 lows that we have already identified as forming the bottom of a sideways-orientated range.
SEB: The British Pound is Due a "Renaissance"
Turning away from technicals to fundamentals, we hear that Sterling is oversold.
One of the more interesting pieces of research to have come out this September advocates for an extension of GBP's recovery.
SEB’s FX Strategist Carl hammer has told clients he is constructive on Sterling in the short-term having noted the decline following the Brexit vote was too deep and left the currency at valuations that represent a crisis.
And, the Brexit vote is no crisis.
Economic factors such as the string of positive recent data releases, the weak Pound which has given a boost to manufacturing, exports and tourism, and a supportive monetary policy environment are all positives.
According to Hammer, these offset the main negative, which is the fall in foreign capital inflows due to uncertainty over Brexit and post-Brexit trading relations.
Positive Risk Sentiment Aids Sterling Recovery
The new week starts with a positive tone for global markets.
Sterling has shown it responds positively when investors are in risk-on mode i.e they are buying stocks and commodities.
This could be a function of the new perception investors have of the currency in the age of Brexit.
The FTSE 100 saw a strong start to the week having put on a near-100 point rise since the session began.
"The Pound has understandably also enjoyed the shift in sentiment in regards to what the Fed will do in Wednesday, taking nearly half a percent back off of a struggling Dollar," says Connor Campbell at Spreadex in London.
Meeting in Bratislava Hints at Crisis Point for the EU
The meeting of the 27 heads of state in Bratislava on Friday has highlighted some of the long-standing tensions within the union.
Some want to push through with deeper integration such as France’s Francois Hollande and Germany’s Angela Merkel, whilst others – particularly in Eastern Europe which has seen a swathe of increased support for new Populist Nationalist-leaning governments want to reduce the power of Brussels.
For a measure of how significant the summit was to the future of the Euro, take Angela Merkel’s comments as she arrived at the gathering:
"We need solutions for Europe and we are in a critical situation."
Clearly the divergence of views and uncertainty over the bloc’s future may be a long-term factor weighing on the Euro.
Mid-August to early-September foreign exchange price action saw the euro fall against the Pound partly as a consequence of the Eurozone's weaker inflation outlook.
Data showed a slow-down in labour costs in the Eurozone from 1.6% to 1.0% in August lowered inflation expectations as it reflected continued low wage growth.
The Pound has however since dipped with market expectations for a November interest rate cut at the Bank rising.
