Foreign exchange strategists are projecting further declines in the Euro against the British Pound following the worst two-week run for the EUR/GBP since 2008.
A rapid decline in the EUR to GBP exchange has seen forecasters tearing up their post-Brexit forecasts on the pair with further losses looking increasingly likely.
In the week ending November 11th the Euro fell from a post-election high at 0.9025 down to a close at 0.8607.
The Euro has struggled in global foreign exchange markets since the stunning upset that was Donald Trump winning the US Presidency.
Going into the election the popular theory was that the Euro would actually benefit on a Trump upset with analysts reckoning the uncertainty posed by Trump would lead to stock market falls which would in turn drive a large repatriation of funds out of the US and back into Europe, driving up the Euro in the process.
The EUR/GBP exchange rate would be a cross caught in the cross-fire of this dynamic, and was also expected to rise.
However, markets like the pro-growth and reflationary theme that they believe Trump represents and have in fact risen with the Dow Jones hitting an all-time high on November 10th.
The Euro has in fact been one of the more notable losers of the post-Trump victory financial marketplace.
As such, analysts at Bank of America Merrill Lynch have written to clients telling them that an in-house quanititative model is signalling the Euro to Pound exchange rate is now a Sell.
The call comes as EUR/GBP falls right back to where it was at the end of September ensuring the hefty losses seen in October - the month of that infamous flash-crash - are unwound.
"This week the strongest quant signal is selling EUR/GBP. Time-zone analysis shows local London-hours demand for GBP continues, supporting the currency. Our favorite expression, based on the positioning model, is to sell EUR/GBP," says Christopher Xiao at Bank of America Merrill Lynch.
Xiao says residual skew has moved firmly for EUR/GBP puts, suggesting options investors are looking to fade recent EUR/GBP strength.
"Plus, Up-Down vol indicator shows greater volatility when the spot goes down. This places EUR/GBP uptrend at risk, in our view," says Xiao.
The Pound is one of the winners as the election result drives an outlook for faster inflation in Europe, according to bond-market gauges.
The U.K. 10-year break-even rate, a measure of expectations for retail prices derived from government bond yields, rose to the highest in almost three years.
This sugggests the Bank of England will have to raise rates faster than previously anticipated by markets, which in turn should support the currency.
And it's not just Bank of America who believe further losses are on the cards for EUR/GBP.
Yann Quelenn, Market Strategist at Swissquote Bank, in Gland Switzerland has been watching the EUR/GBP exchange rate and noted it has has broken through the support level given around 0.8857, which was the 04/11/2016 low.
Support levels are points of intense buying interest where traders step into the market to buy a product they believe to be oversold.
Support areas are chosen by traders as a potential point at which a trend turns based on previous evidence of such occurrences having taken place.
However, that this support level has been broken is indicative that the pair is finding it harder to find supportive interest, and could therefore fall further.
To the topside, any rebounds in the Euro are tipped to be met with selling resistance at 0.9047 which constitutes the 30/10/2016 high.
The EUR/GBP is “expected to further decline and to break its channel”, says a bearish Quelenn.
That said, in the long-term, the pair has largely recovered from recent lows in 2015.
As such, those with a longer-term view, that spans many months, should note that the technical structure suggests a growing upside momentum.
“The pair is trading far above from its 200 DMA. Strong resistance can be found at 0.9500 psychological level,” says Quelenn.
Therefore, those with the luxury to wait for a stronger Euro are best served by sitting back and waiting for the currency’s dominance to reassert itself.
Lloyds are also optimistic that the Euro has more fuel in its tank to burn higher if you are to take a multi-month view.
"Longer term, aligned with GBPUSD, we are wary that another move to test the 0.9802 highs set back in 2008 can’t be ruled out and we are monitoring medium-term price action to confirm whether this will be the case, or whether 0.97 was a lower high within a broad range," says Wilkin.
Commerzbank: EUR/GBP Rally Over
Analysts at Commerzbank have this week written to clients telling them that the lion’s share of the Euro’s recent outperformance over Sterling may be over.
Much of this view is hinged on an expected slowdown in German economic growth.
“While the outlook for Q4 has improved of late, the economic balance for Q3 should turn out rather weak. We expect that the German economy grew by only 0.2% on the preceding quarter, which would mean that the growth rate was the slowest since last year. The Federal Statistical Office will only release the details in the week after next,” said Commerzbank’s Ralph Solvene.
Another major drag on the single currency is likely to come from increasing political risk, as markets start to price in the possibility of further political instability in the Eurozone.
A referendum in Italy may cause an upset and see the Five Star anti-EU party gain a foothold, however, the main threat at the moment comes from the Netherlands in March where Geert Wilders vehemently anti-Eu party is leading polls on a ticket to take
the country out of the EU with immediate effect.
As such whilst the outlook for the Dollar is positive, that of the Euro is probably tipping to the downside.
EUR/GBP is forecast to move lower and should remain stuck in a range between 0.8520-0.8800.
Prospect of US-UK Trade Deal Adds Fire to Sterling Recovery
While the big bond repricing move is the primary driver of the Pound's advance we note too that hopes for a favourable US-UK trade deal have risen since Trump won the US presidential race.
"I think the pound could be particularly positive on a Trump presidency because he has warmly extended the hand of friendship to Theresa May and wants to see her first when he actually takes up the Presidency in Jan," says Kathleen Brooks at City Index. "This opens the door to an earlier trade deal with the US, compared to what Obama offered, which could make our economic prospects outside of the EU much brighter."
We note news reports that Vice President-Elect Pence has phoned Boris Johnson - the first foreign official he has reached out to which further suggests a new US administration will look at the UK quite favourably.
These evolving dynamics could go some way in allaying fears of the economic impact an hard-Brexit implies.