- Pound to Euro rate today (7-12-16): 1.1761
- Euro to Pound Sterling rate today: 0.8503
EUR/GBP strength is likely to be a short-lived affair says one of the UK's leading foreign exchange analysts.
The Euro plunged to 0.8300 against Pound Sterling in the immediate aftermath of the Italian referendum but then went on to stage an impressive short-covering rally, the effects of which still appear to be with us in mid-week trade.
The bounce in the Euro exchange rate complex was a classic "sell the rumour, buy the fact" move - markets somehow realised that the referendum result was not a fundamental threat to global finance and the shared currency would have to recover to pre-vote levels.
Adding further insights into the Euro's action is ING’s Petr Krpata who explains the rebound in the Euro as due to increased expectations that the European Central Bank (ECB) will remain accommodative at their Thursday, December 8 rate meeting.
“Given the spike in EUR, the decline in EUR/USD volatility premia and higher Eurozone equity markets, this suggests that markets seem to have priced in a glass half full view, downplaying risks associated with Italian politics, its banking sector and expect further ECB support via an extension of QE with no tapering (as under a taper expectations scenario, equity markets would be under pressure while peripheral spreads would be widening more meaningfully),” said Krpata.
His contrarian view is that the Euro is likely to weaken if the ECB announce a winding down or tapering of asset purchases at their meeting because it will increase the risks of a default in the fragile Italian banking system.
“Hence, if the ECB delivered a form of QE tapering this may, in turn, increase EUR risk premium due to concerns about EZ periphery and Italian banking sector and not be outright EUR positive under current circumstances. For today, EUR/USD should hover around 1.0700,” said the ING analyst.
Technical View Shows Robust Support
Despite Krpata’s view that the EUR/GBP pair is in a steady sell-off and the Euro will probably continue weakening, charts are showing a lot of support underpins the current level.
There is a long-term support and resistance level at 0.8325 and the 200-day moving average at 0.8300, both of which pose a considerable barrier to more downside.
The pair also appears to be at the base of a falling channel, indicating the chance of a rebound higher within the channel.
MACD appears to be 'bottoming' and poised to turn higher.
Whilst the overall short-term trend remains undoubtedly down, we could very well see support hold and a move higher over the next week or so, with a target at the S3 monthly pivot, at 0.8549.