Danske, Lloyds: British GBP/EUR Exchange Rate can go Higher
Pound Sterling has staged an impressive recovery against the Euro over the course of the past 24 hours in a move that confirms the currency retains a positive bias.
- Pound to Euro rate today: 1 GBP = 1.1630, week's low: 1.1484, week's high: 1.1670
- Euro to Pound Sterling rate today: 1 EUR = 0.8596, week's low: 0.8568, week's high: 0.8707
The underlying structure to the GBP/EUR market has shifted over recent weeks with markets turning more bullish.
GBPEUR has extended the recent ascent through almost all the key short-term resistance levels with strategist Robin Wilkin at Lloyds Bank eyeing important medium-term resistance as the targets in the 1.1976-1.20 zone.
Wilkin is however cautious that Sterling must unwind some of its recent gains near-term.
Intra-day studies are turning from overbought, warning a corrective slip should be seen soon, so his focus is on how the market develops in that process.
However, while above support at 1.1482-1.1364 Wilkin reckons the current trend from 1.1050 region remains alive.
It is possible that the weakness seen on Tuesday November 15th is a symptom of this overbought market unwinding.
Analysts at Danske Markets also see a more constructive outlook for Sterling with a maximum target situated in the vicinity of that laid out by Lloyds.
In a briefing to clients Danske Markets say while Trump's win might be positive for GBP they still do not know much about his political plans and in the near term, price actions might be very sensitive to any news or speculation on this front.
Danske are currently sidelined on GBP but would look for opportunities to sell GBP against USD or EUR if the rally continues, “as we still believe that GBP could be hit again once the UK government triggers Article 50 and Brexit negotiations kick off.”
Analysts are currently reviewing their GBP/EUR forecasts but expect the exchange rate to settle in the range of 1.2048-1.1363, similar to where the conversion traded before a hard Brexit was priced in.
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.
Pound in Brexit Scare as Memo Suggests UK has no Brexit Strategy
Unfortunately for Sterling, whenever Brexit is mentioned the reaction is typically negative.
The media were on Tuesday November 16 awash with the revelation that the Government has no Brexit strategy in place.
A leaked memo seen by The Times tells of high-level cabinet splits on the correct strategy to approach regarding Brexit with the head-liners such as David Davis, Liam Fox and Boris Johnson lined up against Chancellor Philip Hammond and Greg Clark.
Furthermore, the report suggests up to 30 000 extra civil servants will be required to fulfil Brexit-related projects.
However, responding to the claims, David Jones, a minister in the Department for Exiting the European Union, said: "that is a nonsensical figure which we certainly don't recognise."
The memo is said by but it is dated November 7th and titled Brexit Update.
The release of the document, combined with news that UK inflation had fallen back in October and a broad-based profit-taking on last week's rally saw Sterling slide lower.
The report notes that “major players” in UK business are expected to “point a gun at the government’s head” after ministers gave assurances that the carmaker Nissan would not suffer when Britain left the EU.
It is critical of Theresa May’s governing style, saying that her tendency of “drawing in decisions and details to settle matters herself” cannot be sustained.
The report reignites fears that the Brexit process will be long and drawn out while having the potential to divide the UK's leadership, allowing for the Europeans to impose a punishing Brexit settlement.
The Government has however officially responded to the news saying it did not recognise the document and noted it to be unscolicited with no authority.
It is believed to have been put together by an external accountancy firm.
The Pound fell on the news in a reminder that it remains sensitive to this topic.
"The UK still faces a deterioration in long-term growth due to the pending complete overhaul of its foreign trade arrangements," says Paul Meggyesi at JP Morgan in London.
JP Morgan advocate selling the Pound as a result with GBP/USD forecast at 1.23 at year-end and GBP/EUR falling to 1.05.
Three Line Brexit Bill
In further developments on the Brexit matter, the BBC reports that the government has prepared a short three line bill to begin the process of leaving the EU - so Theresa May can meet her March deadline to trigger Article 50.
Sources say they believe the legislation is so tightly drawn it will be difficult for critical MPs to amend.
Ministers have drawn up the legislation in the expectation that they may lose their appeal to the Supreme Court, which would force them to consult parliament.
Sources say they would plan to introduce the bill in the Commons immediately after the Supreme Court ruling.
Markets won't like the sound of this because it appears that the bill will effectively shut out any attempts for Parliament to work in any necessary conditions required to guarantee a soft-Brexit.
Pound Vulnerable to the 'Trump Trade' Ending
The Trump victory in last week's presidential elections were a boon for Sterling which put in some strong gains against its G10 rivals.
With rising bond yields being the prime driver of global foreign exchange movements, the question then becomes whether the dynamic can extend, particularly for Sterling which has shown it likes these conditions.
Not everyone is convinced the move higher in US yields can extend; and if they are correct then the dynamic of a stronger US Dollar and a stronger GBP/EUR exchange rate could become questioned.
“We believe that the reaction to Trump’s presidency is overdone, and rates will revert in the near future, in particular in the Euro area,” says Piet Philip Christiansen, Rates Strategist at Nordea Markets.
However, Christiansen hedges his call by noting it may still be too soon to call an end to the dynamic:
“It’s important to note that the risk reward of such positions doesn’t look intriguing at current levels, so we prefer to stay side-lined until markets have calmed down before re-entering long positions.”
Also warning that the trade could be reaching its peak is Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank in London who says he is not fully convinced the 'Trump trade' is a sure-fire bet.
"We believe uncertainty remains firmly in place, and as investors try to assess the political route Mr. Trump will take, the market will be subject to larger-than-usual intraday swings and volatility. Fundamentally, we remain bearish on the USD, as we believe its current level cannot be justified by real rate differentials."
Euro Under Pressure
The recent moves lower in the Euro appear to be driven by persistent weakness in the Euro exchange rate complex and can be explained by the fact that the yields on government bonds in the US and UK are rising at a faster rate than those in the Eurozone.
In fact the EUR/USD is a whopping 1% lower suggesting a combination of Euro weakness and US Dollar strength are aiding GBP/EUR in maintaining its gains.
“The single currency fell further on Monday and reached 1.0773, its lowest level since January 7th, as market participants anticipate an acceleration of the Fed’s tightening path as Trump’s infrastructure spending plan is expected to boost inflation and growth,” says Yann Quelenn, market analyst at Swissquote Research.
Developed market bond yields continued to track higher, driven by expectations that a Trump administration will favour greater fiscal stimulus.
With 10-year Treasury yields ending at 2.15%, the highest since January, and up some 30bps since the US election.
Fed funds futures are pricing in an 85% probability of a December hike which ensures next month's meeting is sealed in the eyes of markets.
Gilt yields have also been pulled higher with the payments on UK debt due for expiry in ten years steadily climbing to 1.380 at the end of last week.
And today they have spiked to 1.49 per cent, the highest since the end of May – almost 1%higher than three months ago.
The Pound has moved higher in tandem as investors send money to the UK to take advantage of the growing yield.
