AFEX: GBP/EUR Exchange Rate Recovery Untenable
- Pound to Euro Rate Today (28-11-16): 1 GBP = 1.1736, day's best: 1.1779, day's low: 1.1672
- Euro to Pound Sterling Tate Today: 1 EUR = 0.8522, day's best: 0.8567, day's low: 0.8492
Pound Sterling remains in a corrective period of appreciation against the Euro and this should not be mistaken for a sustained recovery argues a leading technical analyst.
Sterling has recovered from lows registered near 1.10 to the present valuations above 1.17 in a move that has many watching the market believing the great 2016 sell-off could be over.
However we are told that current strength is seen as a response to prior oversold readings only and on this basis should prove corrective and therefore untenable.
Analyst Lucy Lillicrap has taken a look at the recent price action for clues on future direction.
Her belief that Sterling is not yet in a position of sustainable strength against the Euro is premised on the need for some clear triggers to be pulled.
The rules written into technical analysis allow us to approach a currency pair with a cool and logical head which helps us to avoid mistiming the market.
"The market would need to establish itself back beyond 1.2000 at least to reduce negative pressure meaningfully otherwise the relative absence of base work argues upside scope has already become somewhat limited," says Lillicrap.
Furthermore, "a drop back through 1.1625 will be required to signal an interim top has been seen but resistance also begins at 1.1875."
GBP/EUR
Daily Chart Showing live Inter-Bank Rate and Indicative Rates for International Payments.
End of the Correction Hinted in Diagonal Topping Pattern
The GBP/EUR is zig-zagging higher within a rising channel.
The continued ascent appears to have been sustained by better-than-expected Business Investment which came out at 0.9% in Q3 (QoQ), compared to 0.6% expected on Friday, November 25.
Business Investment is one of the areas of the economy which was expected to be most heavily hit by Brexit so a positive result is a strong sign of resilience in the economy and it justified another attempt at November highs.
But, the Pound's rise could be an ending in diagonal topping pattern.
This is a form of Elliot wave pattern which occurs at the final stage of a trend and would seem to indicate a possible end to the current short-term uptrend:
Nevertheless, until there is a break lower, it is still too early to argue the uptrend is over.
A break below the 1.1675 would be necessary for confirmation of more downside, to a target on support and resistance at 1.1585.
For more information about the ending diagonal, I have included an excerpt from Dr. Thomas Bulkowski, a recognised pattern expert’s explanation.
“The ending diagonal triangle, or wedge as many call it, is a narrowing price move composed of two converging trendlines highlighting a wave 5 (many times) extension pattern.
“The chart below shows the ideal example. The ending diagonal is a special type of motive wave that occurs primarily in the wave 5 position when price has moved too far and too fast."
“I like to think of it as a rising or falling consolidation," says Bulkowski. “Some ending diagonal triangles appear in the C wave of an ABC correction, but that configuration is rare.
In all cases, the ending diagonal terminates the move of larger patterns. Diagonal triangles substitute for impulse waves notes the analyst.
Please note that until there is a break lower the up-trend remains intact and there is still a chance it could carry on higher to the next target at 1.1870.
Confirmation of such a move would come from a move above the current 1.1820 high.
Latest Pound/Euro Exchange Rates
  | Live: 1.145▲ + 0.06%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1061 - 1.1107 |
**Independent Specialist | 1.129 - 1.1336 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Data to Watch for the Pound
The main release in the week ahead is Manufacturing PMI in November on Thursday, December 1, which is forecast to rise to 54.5 from 54.3 previously.
Construction PMI, out on Friday, December 2, is forecast to fall to 52.3 from 52.6 previously.
Pound Sterling continues to supported by surprisingly good data.
Last week’s Q3 GDP revisions showed no change from the positive preliminary estimates, helping to support confidence further.
Whilst growth remains lopsidedly weighted in favour of Services and out of favour with Construction, the fact that Business Investment beat expectations was reassuring to those who had feared companies would put off investment decisions in the wake of the uncertainty created by Brexit.
One proviso is that analysts are cautioning not to read too much into the data, with both Markit and Capital Economics making the point that Q3 investment decisions may have already been taken and the real hit to investment is likely to come after Article 50 is triggered, however, overall it cannot be argued the data is weak.
This seems to indicate GBP/EUR has the potential for more growth, especially given how negative and uncertain the outlook is for the Euro - particularly in the sphere of politics, which seems to be the new driver for currencies as we enter a new world order.
The Italian referendum on December 4 and the Austrian Presidential Election on the same day are likely to deliver verdicts in line with the trend away from establishment politics to more radical extremism.
The real test for the Euro, however, will probably be in the Spring when The French decide their president and the Netherlands looks set to vote in an anti-European government.
Currently, the outlook for the Euro is looking a little better after primaries showed Francios Fillon is likely to be one of the contenders for the Presidency.
In a contest between Fillon and Marine Le Pen of the Front Nacional, Fillon would have a better chance of winning than most other competitors as he already embodies many of Le Pen’s right-wing policies in his Catholic Right wing politics.
Data to Watch for the Euro
The big release for the Euro will be November CPI at 10.00 (GMT) on Tuesday, November 30. It is expected to show a 0.6% rise YoY.
Given recent mixed signals about what the European Central Bank (ECB) is likely to do with its stimulus programme November’s inflation rate could provide the market with more clarity.
