Best GBP/EUR Exchange Rate Since the Flash-Crash as GBP/EUR Rallies 1.2%

GBP/EUR has staged its strongest advanced since July on a combination of positive newsflow and short-covering.

Sterling hit a nine-day best having reached a weekly high at €1.1219 on the inter-bank market.

The pair's close at 1.1201 ensures the 18th of October's advance was the strongest since July 20th.

It has since pared the gains and is quoted at 1.1178 at the time of writing having.

This is still the highest rate of exchange since the infamous flash-crash of October 7th when the Pound crumbled as algorithmic trading programmes sent the currency into a meltdown.

The move has brought the best-possible rate offered on international payments back to around the 1.10 marker.

We believe that the recovery in Sterling - which began late on Monday - is actually the result of a short-squeeze.

Data shows that bets wagered against the currency on international options markets remain at their highest since  2013 thanks to a steady souring of sentiment towards the currency in 2016.

A short-squeeze is a technical phenomenon whereby a market that is heavily biased against a currency is forced into retreat.

Think about it - if everyone is betting the same way it becomes harder and harder to find the required market entrants to keep rowing the boat along.

When some traders jump out of the trade there is a risk that the move forward stops forcing others to bail-out ensuring a sudden reversal in the currency.

“Overwhelmingly bearish short positioning could result in a panic unravelling of short bets, if the pair suddenly reversed its course and started going higher,” explains Richard Kelly at TD Securities who sees Sterling increasingly vulnerable to such moves.

Others agree.

"The fact that the GBP is not weakening today is perhaps due more to short-covering around politics," says Shaun Osborne, an analyst with Scotiabank.

"Sterling must wonder what is going on – this is the first session since late September that spot has set even a marginally higher high versus the previous session’s peak," quips Osborne.

Such short-covering moves can be sharp and sudden but, importantly, are not a fundamental reflection of the underlying pressures that are likely to keep driving the currency.

Latest Pound/Euro Exchange Rates

	Live: 1.1449▲ + 0.05% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.106 - 1.1106
**Independent Specialist	1.1289 - 1.1335 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Therefore, this plays into the view that the Pound could find itself going higher over the near-term before ultimately resuming the broader decline.

“We expect investors to remain wary of Sterling, not least due to ongoing political risk,” says Jeremy Stretch at CIBC Markets.  

Stretch adds that slowing growth, rising price pressures, (expect CPI to continue to rise well into 2017) and ongoing political risk underline that despite the weight of positing Sterling rallies are likely to be limited and be met with ongoing selling interest.

Pound Boosted on Hint of Parliamentary Approval for Brexit Trigger

The Pound's move higher has also been attributed to developments in the High Court where the Government is defending against a challenge over who has the right to trigger the UK's exit from the European Union.

Lawyer James Eadie, representing the government, said parliament would "very likely" have to ratify any Brexit deal with the EU.

Investors generally assume British MPs as a whole are less in favour of a hard line on Brexit than Prime Minister Theresa May and the ministers she has put in charge of negotiations.

Sterling remains highly sensitive to sentiment and concern Britain is heading for a hard-Brexit in which it loses free access to the single market has knocked another 7% off the Pound's value over the past three weeks.

"Sterling outperformed the Euro and the Dollar. This Sterling rebound was triggered by comments in a London court of the UK government lawyer. He indicated that the Brexit treaty was likely to be voted on by both houses and that Parliament will have a central role in changing domestic laws.

Markets considered these comments as reducing the chances on a hard-Brexit, supporting sterling," says Piet Lammens at KBC Markets in Brussels.