Pound Continues to Defend Key Support Level Against Aggressive Euro
Pound Sterling refuses to move below a key support level against the Euro which suggests we could be entering a period of relative stability.
Sterling remains a currency driven by sentiment and technicals at present.
Data has clearly been off the UK currency's radar for some months now with the big moves coming off the back of Brexit-related headlines.
The Pound stabilised towards mid-October as it took increasingly worse news to drive the hard-Brexit trade; like everything even negative news relating to Brexit is subject to the law of diminishing returns.
We are now left in an environment where good news is likely to start having more upside impetus alongside technical considerations.
From a technical standpoint we reported in late October that Thomas Anthoj at JPMorgan was watching the 1.1078 area to provide support to the Pound:
The analysis appears to have been bang-on as we have since seen the UK currency bounce along this support level:
The bounce seen in mid-week would suggest that buying interest picks up in the 1.1077-78 region so we would allow for the bounce to perhaps extend further.
However, the Bank of England super-Thursday event is packed with risk in both directions for Sterling so be aware.
There is also the small issue of the US election to consider as we note it has had some gravitational pull on Sterling.
Latest Pound/Euro Exchange Rates
  | Live: 1.1461▲ + 0.16%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1071 - 1.1117 |
**Independent Specialist | 1.1301 - 1.1346 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Euro Stronger on Fresh Deutsche Bank Woes
Shares in Deutsche Bank fell by 1.62% in mid-week trade, reminding us that the EU banking issue remains with us.
The fall in Eurozone bank shares come amidst a broader risk-off environment triggered by uncertainty over tightening polls ahead of US elections.
Within such conditions riskier assets tend to get punished and the safe-haven Euro benefits.
“The main focus has been on fresh banking troubles in Europe, as both Deutsche Bank and Monte de Paschi return to terrorise investors. And we thought Halloween was safely behind us,” says Chris Beauchamp, Chief Market Analyst at IG.
Beauchamp points out that we had yesterday’s news about the rescue plan seemingly falling apart, and, “I think it’s likely that we’re seeing some speculative funds moving back out of banks as well after a very strong performance for the sector as a whole”.
So while there is no specific trigger Beauchamp thinks, “momentum traders leaping on nascent profit-taking and causing a negative feedback loop”.
Many commentators believe EU banking crisis = bad for the Euro. This is not the case with the opposite being true.
The EU has a massive current account surplus which means it is a net investor in the world economy; therefore when risk is high those investors tend to repatriate their capital which bids up the Euro.
The banking news has combined with comments from a German economic body to the effect that the ECB’s QE policy needs to be scaled back.
“While the ECB is unlikely to change policy purely on the back of this, it has acted as a reminder that discontent with Mario Draghi has not gone away; criticism of central bankers, it appears, is not confined solely to the UK,” says Beauchamp.
Closing of US Presidential Election Polls Encourages Strong Euro Advance
The Euro advanced against both the Pound and Dollar on Tuesday the 2nd with GBP/EUR slipping from an open of 1.1152 to the close at 1.1068.
The reason why this decline happened is, surprisingly not Brexit-related - there have been no new headlines that are particularly negative for the UK currency.
Indeed, a look at the board shows that Sterling is mixed and weakness is not ubiquitous as is the case in bouts of Brexit-inspired decline:
Note the gain against the US Dollar - typically we would expect Sterling to fall in tandem against both the Euro and Dollar.
Note too how the EUR/USD has risen by a greater margin than has EUR/GBP.
There was certainly a whiff of Euro strength on the air.
Also note the deep decline in GBP/CHF. The Swiss Franc is a traditional safe-haven and that Sterling has fallen so notably tells us something about how investors are approaching risk at present.
There is certainly a sense of concern in the markets and safe-havens are benefitting but NOT the traditional safe-haven USD.
Concern appears to be stemming from the sudden closing of the gap in polls between Clinton and Trump.
"While it was only one poll, one national poll putting Trump in the lead was all that was needed to jolt a complacent market," says Viraj Patel at ING in London.
Markets are now contemplating a Trump victory and what it means.
Trump is certainly the most controversial of candidates and his policy mix regarding the economy is so mixed that investors are betting that the Fed may have reconsider that December interest rate hike.
No interest rate hike in December = a lower US Dollar = a stronger Euro.
And by proxy, this suggests a weaker Pound to Euro exchange rate in the current environment.
So just when you thought Sterling had enough on its hands by way of politics and it couldn’t get worse, you have been proven wrong again!
However, for GBP/USD the outlook has suddenly turned a little brighter.
"The recent resilience of equity markets to steepening yield curves gave way yesterday and the spike in the VIX suggests that we’re in for a spell of risk-off, at least until election day," says Patel.
