- 1 GBP to EUR rate today: 1.1661, best rate of the week: 1.1779
- 1 EUR to GBP rate today: 0.8576, best rate of the week: 0.8543
The British Pound has extended its December sell-off on Thursday December 29 following a brief period of consolidation above the 1.17 zone.
The GBP/EUR has since fallen below this congestion zone and is fast approaching the target we said it would when we laid out our forcasts at the start of the new week and again in our mid-week technical call.
A lack of market-moving news over the Christmas period has ensured volatility in the GBP/EUR exchange rate has fallen and In such conditions traders often tend to focus on technical drivers and this allows us some cues regarding future moves.
So where exactly is our near-term target for the exchange rate in light of the extension of the December sell-off?
Our studies suggest GBP/EUR has now confirmed a break below a major trendline from the October lows which increases the chances of a continuation lower.
We believe a break below 1.1700 would confirm a bearish extension down to 1.1610, just above where the 50-day Moving Average (MA) is situated.
Moving averages are not just used to assess the trend but also act as physical barriers to price in financial asset charts.
The recent trendline break is quite a significant development, as according to Technical Analysis theory (see Pring, "Technical Analysis Explained"), when price breaks below a trendline, as in GBP/EUR, it is generally forecast to fall the same distance as the move prior to the break.
On the above chart the move prior to the break has been labeled ‘x’ and the move after ‘y’.
The next move will probably be the fulfillment of ‘y’ down to a target at around 1.1600.
Therefore we will allow the current bout of weakness to push towards 1.1600-1.1610 ahead of a reassessment of the pair's technical fortunes.
ECB 'Taper Talk' Provides Upside Risk for Euro
From a fundamental perspective, we note a number of analysts are bullish on the Euro.
The lowering of monthly purchases by the European Central Bank (ECB) at their December meeting has been interpreted by many as a form of tapering despite the fact the length of the programme was extended until the end of the year.
Economic growth in the Eurozone has been characterised as gradual, low but ultimately steady, and this trajectory suggests a gentle improvement over time.
This indicates a high probability that the Euro will start to see gains from an unwinding - or expectations of unwinding - of ECB policy initiatives in the second half of 2017.
As such, any sign of further tapering of asset purchases will improve the outlook for the Euro.
The Pound is in a slightly different situation in relation to monetary policy as longer-term prospects are clouded by uncertainty over Brexit, which will not be clarified until the process of departing the EU finally begins.
No-one knows yet what the full impact of Brexit on the UK economy after the triggering of article 50 - and much less after the actual divorce.
Whilst the economy has been doing surprisingly well up until now, we still don't know how well it will do in the medium to long-term, particularly as inflation is set to catapult higher pinching already strapped real household income's further.
Political Uncertainty: Tough Year Ahead for Euro and Sterling
Both the Pound and the Euro are subject to political risk in the short and medium term.
The Pound will probably be affected by the decision taken in the Constitutional Courts, to be announced sometime in January, on whether the government has a right to trigger Brexit without recourse to parliment.
If the court says it does then the Pound will probably fall as it will increase the chances of a "Hard" Brexit and a negative shock to the economy.
If parliament has to be involved the Pound will probably rise on hopes of a softer Brexit deal.
Recent Brexit talk has swing to the Harder end but the damage has been offset by talk of an interim 'bridging' solution which would see the UK as remaining in the common market in some way but not in the EU.
Most members of Parliament prefer a softer exit, but some hardliners want to put immigration above everything else, leaving Britain at risk of losing access to the single market.
"The best case scenario for the U.K. economy and Sterling would be if the U.K. remains within the single market that allows for tariff free movement of goods, services, money and people within the EU. This would be similar to the Norway model but in order to receive these benefits, Norway had to accept the EU's rules for free movement of labor," says Kathy Lien, Director at BK Asset Management.
Lien says the Government are unlikely to concede to these terms as immigration was one of the main reasons for leaving the European Union.
In the coming year, delays in Brexit negotiations could provide temporary support to the currency but the ongoing uncertainty is negative for the economy and currency.
Businesses have already delayed spending and according to the IMF, even if EU negotiations limit political fallout next year, the U.K. economy will still grow by only 1.1% - half of their previous forecast.
"Unfortunately the Bank of England can't provide much help as their ability to ease monetary policy in the event of slower growth is limited by the sharp rise in inflation. Sterling is down 16% year to date and policymakers expect this weakness to lead to a sharp rise in inflation in the coming year. So with the central bank's hands tied and investment expected to remain weak, we anticipate a further decline in sterling versus the U.S. dollar and euro in the first half of 2017," says Lien.
For the Euro the uncertainty is more about the threat of another member exiting the EU.
Italy, Holland and France all provide potential falshpoints as they all have elections in 2017 and strong anti-EU parties.
Nevertheless in all cases the chances of an outright exit remain small.
Even if Italy holds elections this year and elects the anti-EU 5 Star party, their hands will be tied by the more politically balanced upper house or Senate which is unlikely to veto a referendum on membership of the EU, potentially delaying an exit bill for years.
Holland has major legal obstacles to leaving the EU, even if the anti-EU freedom party win elections in spring, and even though they are the party with the largest share of the vote, they will probably need to enter into a coalition to have a governable majority, potentially diluting any exit plans they may harbour.
In France, Marine Le Pen is likely to end up in the final round of the Presidential election but is highly unlikely to win.
Her odds have been curtailed even further by the nomination of her probable opponent Francios Fillon, for the Republicans, who is almost as right-wing as her (but pro-EU) and therefore likely to steal many of her voters.
Whether or not the risks are big or small, however, they seem to already be having a negative effect on inbound investment, and therfore demand for the Euro.
The highest profile investor to be put off making a deal due to political risk, is the Qatari soverign wealth fund, who were going to invest 1bn to bailout the struggling Italian lender Monte Dei Paschi but pulled out at the last minute due mainly to fears over policitcal uncertainty.
Falling agregate foreign invetsment in the Eurozone is likely to weigh on the Euro in the long run.
Buyers and sellers of the Euro, therfore, should focus research on determining the levels of support enjoyed by anti-EU parties in Europe.
Factors such as increasing terrorist attacks may increase Eurozone political risk as attacks tend to polarize support in relation to issues overlapping EU membership such as border control and integration of security and surveilance services.
Data on the Horizon
The next major release for the Euro is on Thursday and comes in the form of New Loans in November, which are expected to show a 1.9% rise.
Whilst it is not a tier one release and is unlikely therefore to move the Euro, the result may contribute to the formation of European Central Bank (ECB) policy.
A higher-than-expected rise in New Loans will show that the ECB’s stimulus measures are transmitting successfully into the real economy and it, therefore, likely to contribute to strengthening the Euro.
The other release is Money Supply (M3), which is another measure indicating the success of the ECB’s stimulus measures as higher Money Supply will also indicate their successful implementation.
The next major release for the Pound is Nationwide House Prices on Thursday morning (29th) at 7.00 (GMT).
These are expected to show a roundabout 4% rise year-on-year and 0.2% month-on-month.
Mortgage Applications out on Wednesday, showed a slight drop to 40.6k, from 40.8k previously, and was well below the 41k expected.