Recovering British Pound Strikes Best Exchange Rate Against Euro in a Month

Pound Sterling was the best performing currency in the G10 complex for the week ending November 4th. Can we expect further appreciation for the GBP/EUR exchange rate.

The Pound to Euro exchange rate is quoted at 1.1234 at the weekend having come off a multi-week high at 1.1290 on Friday.

Those using Pound Sterling to buy Euros are therefore witnessing the best exchange rates from which to transact  since October the 7th.

Our algorithms concerning the kind of exchange rates you could expect to make international payments with suggest that from a spot market rate of 1.1263 you are looking at rates ranging between 1.0841 through to more competitive quotes at 1.1133.

The Euro to Pound rate is meanwhile quoted at 0.8902 with retail rates ranging from 0.8587 through to 0.8818.

Pound heads for longest run of gains since before Brexit vote https://t.co/XJgbwNG6lD pic.twitter.com/Y8X981AWxv

— Bloomberg Brexit (@Brexit) November 4, 2016

These three events which took place on October 3rd allowed a notable recovery in Sterling to take place:

1) Services PMI easily beat expectations at 09:30
2) Article 50 ruling in favour of those wanting Parliament to have a say on triggering of Article 50 at 10:00
3) The Bank of England keeps interest rates unchanged at November meeting while hiking growth rates at 12:00

The UK government’s plans to leave the EU were tripped up by the High Court’s ruling that only Parliament – and not PM May’s government – is able to activate Article 50 to begin the exit process.

We, and others believe that all the ruling has done is elongated the period of uncertainty surrounding Brexit.

"The ruling goes to appeal next month, threatens to extend the timetable for formal negotiations to start and may in extremis force a General Election. All of which is only ‘good' for sterling within the context of big short positions and bearish sentiment," says Kit Juckes at Societe Generale.

On this basis we doubt the prospect of a protracted recovery.

Nevertheless, Sterling firmed on the news, more likely reflecting the greater scrutiny the exit process should now permit rather than a reduced prospect of EU exit per se.

However, it was arguably the Bank of England which gave Sterling its biggest lift.

"The Pound’s rally found some turbo-charging in the Bank of England which voted unanimously to leave rates at 0.25 percent while it also upgraded its outlooks for growth and inflation, casting doubt on prospects of stronger stimulus in the months ahead. The third positive came from data showing the fastest U.K. services growth in nine months, a report consistent with a resilient economy not in need of additional central bank support," says Joe Manimbo, an analyst with Western Union.

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.

 

The Outlook Suggests Further Gains are Possible

The near-term outlook has turned more favourable to the British Pound with bearish bets against the currency being cleared out of the market.

“It appears that the squeeze on short-GBP positions that we have anticipated has accelerated,” says James Rossiter, an analyst with TD Securities in London. “Looking forward, we continue to see upside near-term potential for sterling to rally against other major currencies.”

The squeeze being referred to is the process whereby a market that is betting heavily in one direction is forced into retreat by a countermove.

As bets are closed out the price moves a little further and in doing so closes more GBP-negative bets in the process.

Another way to look at a short-squeeze is to think of falling dominoes.

The important point to note is such squeezes are technical in nature and don't have fundamental underpinnings, nevertheless the rally higher could yet extend we believe.

The sharp up-day that Thursday 3rd is likely to paint on the charts is certainly a positive for Sterling.

We believe that there could well be some follow-through appreciation.

However, there will certainly be limits to that growth.

As the below levels, courtesy of JPMorgan, show the obvious upside target is at 1.1363. 

Concerning the downside, if we do see buying interest fade over coming days then the defensive level at 1.1078 is unlikely to yield:

We would look to this level to provide a minimum going forward.

Analyst Karen Jones at Commerzbank notes that GBP/EUR has now eroded the 5 month downtrend, and has risen up to the 50% retracement of the most recent leg lower (at 1.1276).

The break of the downtrend has neutralised the immediate outlook as the near-term risk has shifted to the upside and Jones would allow for some advance towards the 1.1462 August high and the 55 day moving average at 1.1470 which is expected to cap further advances.