Pound's Uptrend Against Euro Still Alive, GBP/EUR Exchange Rate Could Even Reach 1.20
The pound to euro exchange rate is steadily pushing higher towards our targets at 1.1900 and 1.2000.
Although it is looking a little overbought, the uptrend remains intact and likely to extend following a pause.
We wrote ahead of the new week that we expect a solid performance for GBP/EUR over coming days and liked the rounded-targets at 1.18, 1.19 and 1.20.
The pair opened the week at 1.1642 is currently trading at 1.1702.
The established short-term uptrend has moved higher following comments from the Prime Minister which suggested she would be steering negotiators towards trying to broker a softer Brexit, and data showing the government did not borrow as much as expected in October.
The pair broke above the previous highs following the news and almost reached our next target at 1.1800 – peaking just short at 1.1784.
The MACD is well above the zero-line adding further weight to the argument for more upside, although it is now ‘cresting; and therefore, the signal is not as bullish as usual.
The pair is a little overbought short-term, according to analysts Bill McNamara of Broker Charles Stanley, but overall he too is still bullish.
“This sharp advance has left it looking short-term overbought, but the overall impression is that it could have further to go before the rally runs out of steam,” said Stanley in a note on Monday.
Tuesday’s activity is occurring inside the previous day’s wide range, and this could be a sign the pair might start trading in a range between 1.1585 and 1.1784.
Nevertheless, a break above the 1.1784 highs would probably conform more upside to our targets at 1.1800 first, then 1.1900 and then 1.2000.
There is now quite a lot of support underpinning price action, including the 1.1645 key lower high and the monthly pivot (PP) at 1.1585.
Latest Pound/Euro Exchange Rates
  | Live: 1.1448▲ + 0.04%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1059 - 1.1105 |
**Independent Specialist | 1.1288 - 1.1334 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
These are likely to contain downside for the pair.
There may be volatility attendant on the Chancellor’s Autumn Statement scheduled for release on Wednesday.
Investors will mainly be focusing on whether he increases stimulus or not, and if he does that would indicate further upside for Sterling.
All Eyes on the Chancellor
The fundamental outlook for Sterling is dominated by the contents of the UK's mid-term budget to be delivered by the Chancellor at mid-day Wednesday.
Philip Hammond will present the government’s economic policy response to the EU referendum result.
"For 2016–17 our economists anticipate that the borrowing requirement will increase GBP8bn, and over the five-year horizon more than GBP100bn of cumulative extra borrowing is forecast. What this means for GBP depends critically on why borrowing is so much higher," says Adam Cole, an analyst with RBC Capital Markets in London.
According to Cole, a deterioration in the borrowing outlook led by a large discretionary easing of fiscal policy would be GBP-positive, as it would support the markets’ tentative move toward pricing in higher policy rates next year.
SONIA attaches an approximately 20% probability to a hike by end-2017.
"A large increase in borrowing which is driven by cyclical factors (weaker growth), however, would be GBP-negative," argues Cole.
RBC Capital Markets think the bulk of the deterioration will be cyclical and despite initial market expectations of a major role for fiscal stimulus, a deteriorating macroeconomic forecast will boost borrowing to the extent that it constrains scope for discretionary fiscal easing.
"The favoured tool for what loosening there could be appears to be public sector investment spending targeted at road and rail maintenance. See our economists’ full preview of the Autumn Statement here," say analysts.
