Pound / Euro Rate Forecast to Retain Mild Upside Bias Over Coming Days
The GBP/EUR is on course to take out its next objective - the target at 1.1280 which protects an advance to 1.1530.
- British Pound to Euro rate today (25-10-16): 1.1236, month-to-date best: 1.1676
- Euro to Pound Sterling rate today: 0.8900, month-to-date best: 0.9435
- Eurozone PMI data beat expectations, ensures Euro catches a slight bid
Pound Sterling retains the gains made over the Euro over the past week and we believe there is the chance that the short-term relief rally could extend a little while yet.
The gains come amidst signs that the currency has absorbed as much negative news regarding Brexit as is possible in the current circumstances.
“A fast and imminent continuation of the bearish trend at this stage is unlikely because a lot of UK bearishness is already priced in the exchange rate,” says Olivier Korber at Societe Generale.
GBP/EUR has over recent days recovered from the tentative floor it formed in the 1.10251/1.065 region when October's headline-inspired declines eased.
The pair is now slowly rising in a new short-term uptrend.
The extremely long, hammer candle which formed on the day of the crash is normally associated with market exhaustion, especially if it occurs outside the borders of a channel, as it did this time:
The current recovery has reached fairly robust resistance in the form of the lower channel line, but we think it will break through that and go higher.
A move above the 1.1280 level would confirm a clear break above the channel line, and a continuation to the upside, towards resistance at the 1.1330 level from the S1 monthly pivot, a level used by traders to counter-trend trade.
From there a move above the 1.1380 level would lead to an extension up to the 50-day moving average at 1.1530.
Latest Pound/Euro Exchange Rates
  | Live: 1.1452▲ + 0.08%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1063 - 1.1108 |
**Independent Specialist | 1.1292 - 1.1337 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Can the Euro Continue Weakening?
The GBP/EUR's recovery had been aided by a bout of Euro weakness sparked by comments from the head of the ECB who last week dismissed rumours the Bank might be actively exploring cutting its stimulus programme.
Indeed, he went further than just dismissing this talk of tapering, by hinting at the possibility of another package of measures being unveiled at the December meeting if the conditions warranted it.
The threat of further interest rate cuts and expanded quantitative easing at the ECB is undoubtedly a negative for the shared currency.
In fact, most analysts expect the ECB to announce a six-month extension to the current quantitative easing programme at November's meeting.
This has hurt the EUR/USD in particular which now trades below Brexit lows. Weakness here is certainly being felt in EUR/GBP and could continue to do so; therefore it may be wise to keep an eye on EUR/USD.
Some analysts believe EUR/USD could actually decline right through until December.
“We remain bearish on the outlook for the EUR. Fed-ECB policy divergence and weak seasonal trends for the EUR suggest 1.05 should be a fairly easy reach for the market into year end,” says Shaun Osborne at Scotiabank.
If this call were to be correct Sterling could have already hit its 2016 low.
Stability has returned to the UK currency on the observation that it will be hard for the Government to create any new hard-Brexit headlines with the ability to move the currency.
Importantly, many have realised that the hard tone is entirely necessary for any party heading into negotiations in which they desperately need to get the upper hand.
Further, research by Civitas suggests that the cost to the EU of raising trade barriers against the UK will exceed the cost suffered by the UK.
Expect both sides to give ground.
Nevertheless, “risk is still on the downside against the backdrop of discussions regarding the right - or least harmful - approach to implementing the UK’s exit from the European Union. On the downside, a strong support can be found at around 1.18, while on the upside, the 1.24-1.2450 will remain the main resistance,” says Arnaud Masset at Swissquote Research.
Euro Resists Further Advances thanks to Strong Eurozone PMI Reading
The Euro's recent weakness has been checked by the release of some better-than-forecast Eurozone PMI data.
It was shown that Markit's Manufacturing PMI read at 53.3 for the month of October, ahead of forecasts for 52.6.
Services PMI read at 53.5, ahead of an expected 52.4 and the Composite PMI now stands at 53.7, ahead of the 52.6 forecasted.
"Judging from the PMI numbers alone, Euro-area GDP could be about the strengthen. The economy seems to shrug off the Brexit vote for now and the manufacturing sector is gathering strength, maybe as a consequence of commodity exporting economies doing better with oil prices in the USD 50/bbl area," says Holger Sandte at Nordea Markets.
However, whether the strong data translates into a sustained recovery in the Euro in the near-term remains doubtful.
"The break below the Brexit low has opened the way towards 1.0820/26. The indicators are bearish across the board. Nor do we expect any significant upside stimulus to come from solid EMU data. Our favoured trading range: 1.0820 – 1.0980," says Ralf Umlauf at Helaba Bank in Frankfurt.
Expect the EUR/GBP to take cues from EUR/USD.
Ahead, watch the German Ifo Business Climate Index out on Tuesday October 25 at 9:00 B.S.T, which is an important forward indicator, is expected to come out at 109.5.
