The British GBP/EUR Exchange Rate Firms, Short-Term Rebound Forecast but Longer-Term Outlook Weak
Pound Sterling is trading an increasingly compressed range against the Euro which hints at an imminent breakout and we believe the next notable move could actually be to the upside.
- Pound to Euro exchange rate today (18-10-16): 1.1103, best rate of the week: 1.1132
- Euro to Pound Sterling exchange rate today: 0.9007, best rate of the week: 0.9058
There were some perplexing media reports released over the past 24 hours that Sterling had fallen to a six-year low against the Euro.
Two major outlets reported that GBP/EUR had fallen below 1.10 and was trading six-year lows:
We thought we may have missed out on another flash-crash but on inspecting the data we can confirm the reports are somewhat fabricated.
While Sterling was subdued at the start of the week it did spend the day well above the flash-crash low of 1.06 and above the second-lowest rate of 1.0944 reached on the 11th of October.
Six-year lows and a break below 1.10 simply did not happen:
Over the past seven days GBP/EUR has oscillated between a best at 1.1151 and low at 1.0944 - the range traded by the pair is actually compressing.
Such compression is usually resolved by a break-out and we believe the move will be to the upside owing to the formation fo what appears to be a basing pattern on the four-hour chart.
If we turn to the four hour charts an interesting pattern can be noted.
The pattern looks very much like an inverse head and shoulders (H&S) which could indicate there is about to be a change in the trend:
If the exchange rate breaks above resistance at 1.1150, which is the neckline of the H&S pattern, confirmed by a move above the 1.1185 level, it will probably continue up towards the 1.1300 mark.
So for now we watch 1.1185 for confirmation.
However, from a longer-term perspective the outlook is a little more bearish.
AFEX's Lucy Lillicrap has briefed clients at the start of the week that despite bottoming for now around 1.0950 prices here have yet to rally in anything other than a corrective manner.
Indeed further (significant) losses remain readable going forward," says Lillicrap, "immediate stability owes more to prior oversold readings than an attempt to bottom out and while values could continue to track sideways for several more days risk still exists for another sell-off thereafter."
Lillicrap argues a rally back through 1.1250 is needed to reduce negative pressure and otherwise 1.0850/1.0750 are targeted in due course.
Latest Pound/Euro Exchange Rates
  | Live: 1.1455▲ + 0.1%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1066 - 1.1111 |
**Independent Specialist | 1.1295 - 1.134 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Sterling has largely become a sentiment-inspired currency over recent weeks therefore watch news headlines, particularly those related to Brexit.
UK Chancellor Hammond is due to address the Treasury Select Committee on Wednesday and PM May is set to meet the head of the EU Commission on Friday.
While Hammond is likely to demonstrate his support for a Brexit deal which guarantees access to the single market and protects the UK’s financial sector, the GBP is unlikely to receive much relief in the face of such remarks given the splits within the cabinet that are said to centre around Hammond.
On Thursday-Friday, Theresa May will go to her first EU summit, where the agenda includes immigration, trade issues and Russia.
"These are not Brexit negotiations, but general EU issues, so how much May will be involved remains to be seen – and she is not known as someone easy to talk to at the watercooler," says UniCredit's Erik Nielsen writing to clients from London.
The media will be eager to tease as much of a Brexit angle out of the meeting as possible, so remain wary of headline risks over these two days.
For the Euro, Watch the ECB this Week
The Euro is looking firm thanks to a decent recovery in the EUR/USD exchange rate today.
The headline EUR/GBP often dictates moves in EUR/USD and with no major news to dictate EUR/GBP this dynamic appears to be in play.
There was some positives for the Euro out on Monday morning on news that Eurozone inflation is picking up. Data showed annual inflation is up to 0.4% in the Eurozone, up 0.2% from August which suggests the prospect of further Euro-negative actions at the ECB are less likely.
Our view is that the main event will the European Central Bank (ECB) meeting on Thursday.
Given the trend is for central banks to be more hands-off there is a high chance the ECB will leave policy unchanged.
One reason why we aren't expecting another rate cut is the growing link between record low interest rates and falling bank profitability – most recently highlighted by the Deutsche bank travails.
However, just because the Bank is unlikely to move rates does not mean it will be uneventful for the Euro.
“The FX market is quickly building USD longs as it moves to price in a December Fed hike. EUR and GBP are the currencies that markets have chosen to short. However, there is a risk of a positioning cleanout if Thursday’s ECB meeting isn’t as dovish as the market is positioned for,” says Stephen Gallo at BMO Capital in London.
A ‘position cleanout’ would be a capitulation by those betting against the Euro and implies a recovery for the currency.
Indeed, BMO Capital are looking to bet on EUR/USD strength in the run-up to the ECB’s Thursday event which implies upward scope for EUR/GBP too.
Mixed headlines have tossed the Euro up and down over recent weeks, first, on talk, the ECB might taper QE and then on reports of a possible six-month extension to QE, and a widening of criteria for bond eligibility, to include bonds with yields below the -0.4% deposit rate.
There has also been much speculation as to whether the ECB might follow the Bank of Japan in targeting bonds of specific duration in order to help bank profitability, which has suffered and contributed to increasing the systemic risk of a banking failure in the region as exemplified in the Deutsche crisis.
Thursday’s meeting will, in many ways, help clarify much of this speculation and also the bank’s policy strategy after all the mixed messages.
"The key concern is whether they are running out of acceptable securities to buy, and therefore in March – or a little later – may end up tapering not because the economy is strong enough, but because they are running low on ammunition. For me, this is not a risk post March, but it could be towards the end of 2017, unless they get creative. The ECB needs to get their communication on this issue right to the umpteenth decimal point," says Nielsen.
Data Calendar for the Euro: Inflation
Eurozone inflation has proved supportive for the Euro with Monday's release showing inflation in both the Eurozone and European Union is up to 0.4%.
Eurozone inflation has risen by 0.2% over the past month and this should be a source of comfort to the ECB which is hoping its policies will succeed in reflating prices, and by extension, growth.
Therefore, the prospect of further EUR-negative policy moves by the bank are diminished, hence the Euro is moving higher.
The largest upward impacts to euro area annual inflation came from restaurants & cafés (+0.08 percentage points), rents and tobacco (both +0.05 pp), while fuels for transport (-0.12 pp), gas (-0.11 pp) and heating oil (-0.10 pp) had the biggest downward impacts.
Data Calendar from the UK: Inflation, Employment, Retail Sales
This is actually quite a busy week in terms of data for Sterling.
Whether markets actually take account of the figures is however debateable.
That said, it would be negligent if those watching the FX market were not aware of what is due Tuesday sees the release of September CPI, which showed a 0.6% rise previously on a year-on-year basis.
Employment data dominates on Wednesday, with Unemployment Rate forecast to remain at 4.9%, Average Earnings at 2.3%, and Claimant Count forecast to have risen by 3K.
Thursday sees the release of September Retail Sales which are expected to have grown by 0.3%.
