Commerzbank forecast EUR to GBP conversion to slide towards the the September low at 0.8337.
The Euro has fallen back down to £0.8576 in mid-week trade as a bounce in the pair witnessed 24 hours previously unwinds.
The EUR to GBP exchange rate shot higher by over a percent at one stage on Tuesday November 15th to reach a 24-hour best at 0.8708. The EUR to USD went as high as 1.0817 but both pairs are now retracing.
EUR/GBP bounced near-term from the 78.6% retracement support at 0.8562 confirming technical considerations may have been behind the move.
"We regard the rally as corrective only," says analyst Karen Jones at Commerzbank in London.
Jones says the Elliott wave count on the EUR/GBP chart is suggesting any strength should fail around 0.8740/0.8800.
Should the currency fall below 0.8562 Jones believes the move will trigger further weakness to the 50% retracement at 0.8502/00 then the 0.8337 September low.
"EUR appears to be fading a modest bounce," says Eric Theoret at Scotiabank who says the move appears to coincide with the release of key high level data including German GDP (softer than expected), French and Spanish CPI (as expected), Italian GDP (stronger than expected), mixed ZEW sentiment figures, and an unrevised Q3 GDP print for the euro area.
Daily Chart Showing live Inter-Bank Rate and Indicative Rates for International Payments.
EUR/GBP has Further to Fall say Bank of America
Strategists at Bank of America are meanwhile keen to continue chasing the Euro lower against Sterling.
BofA's inhouse quant model has given a strong signal to continue 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," say BofA in a note to clents.
"Residual Skew has moved firmly for EUR/GBP puts, suggesting options investors are looking to fade recent EUR/GBP strength. Plus, the Up-Down volatility indicator shows greater volatility when the spot goes down. This places EUR/GBP uptrend at risk, in our view,"
Bank of America believe the case for the European Central Bank (ECB) to extend their quantitative easing programme by six months, at €80bn/month appears strengthened thanks to the rise in bond yields seen in the Eurozone since the Trump election victory.
This means the cost of borrowing in Europe has risen, and the ECB would view this as potentially slowing economic growth over coming months.
The prospect of further easing would however slow down or reverse the rise in yields which would in turn place downward pressure on the Euro.
Euro Oversold say Danske
Expect the Euro to prove resistant to weakness argue analysts at Danske Markets are forecasting the declines in the EUR/GBP conversion to ease as Pound Sterling is starting to look overpriced once again.
The Euro to Pound Sterling exchange rate (EUR/GBP) traded to fresh multi-week lows at 0.8567 in the previous week.
The market is very short GBP, according to IMM, suggesting a substantial correction potential as an overextended market corrects back to a more balanced setup.
“However, according to RSI, EUR/GBP looks increasingly oversold, suggesting that momentum is likely to ease in the short term,” says a note from the foreign exchange strategy team at Danske Markets. “In our view, weak UK fundamentals still justify a weak GBP to offset the negative consequences of a Brexit.”
However, Danske say indications of a closer relationship between the US and the UK justify a repricing of Brexit risk premium in favour of the UK and its currency.
“We are currently reviewing our EUR/GBP forecast but expect EUR/GBP to settle in the range of 0.83-0.88, similar to where EUR/GBP traded before a hard Brexit was priced in,” say Danske Bank.
Momentum still favours Sterling at present with the UK currency benefiting from latent momentum after outperforming its rivals during the course of the week ending November 11th.
A massive global rerating of inflation expectations for the developed world have driven strong repatriation flows towards the United States and United Kingdom as traders expect a faster rate of interest rate rises than previously envisioned.
Strength for Sterling has been broad-based thanks to this dynamic - even against the Dollar - with the important resistance level of 1.2480 in GBP/USD being cleared, suggesting that there should be room for a test of 1.30.
A stronger GBP/USD should aid other GBP crosses higher.
Note that Danske are a little sceptical on how much further the pro-USD, negative-EUR dynamic - or ‘Trump-phoria’ - can last as they believe markets are currently expecting the best of all positive scenarios.
Clearly such a scenario is unhinged and must be rectified at some point.
“Hence, while a Trump win might be positive for GBP, we 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,” say Danske.
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.”