IG say Pound Looking Increasingly Bullish Against the Euro

It has been a day of convincing end to March for the British Pound - the same month that saw the UK triggered Article 50 and begin the process of leaving the European Union.

The GBP/EUR exchange rate rose to a one-month best at 1.1704 as bets against Sterling were agressively unwound.

The moves will come as a relief for those hoping for a stronger Pound, but can the gains continue?

Pound Sterling has been under pressure against the single currency since the UK voted to leave the EU back in June 2016 but GBP could now be in the process of finally forming a bottom.

Foreign exchange and markets analyst Joshua Mahony at IG - the spread betting provider and retail brokerage - believes that there is however more work to be done before we can say the Pound holds the advantage over the Euro.

With the UK having just invoked Article 50 and the start of its exit from the European Union, chatter within financial markets revolves around how the process will affect the value of Sterling going forward.

Mahony has however opted to make a call on the Pound’s outlook through charts having noted that markets have already absorbed as much possible information concerning Brexit as is possible at this point.

“Considering that we have a relatively high threshold for news-based adjustments, there are a handful of signals which we could look at in a search for signs before we are set for our next major move,” says Mahony in a note released March 30.

The Euro has strengthened against the Pound over the course of the past year and has risen in value to the tune of 9.28% and therefore has the benefit of prior momentum behind it.

“Much like GBP/USD, we are seeing GBP/EUR forming a symmetrical triangle, which is perceived as a continuation pattern,” says Mahony.

A symmetrical triangle is a continuation pattern which suggests that the current trend is about to extend.

Thus, the Euro would be favoured to continue its gains.

But Mahony notes that given the recovery seen in the lead up to this formation, “there is also a potential bullish story here”.

But - and this is important - a condition must be triggered before we are able to shift our overall view of the GBP/EUR outlook into a more constructive structure.

“Ultimately we would need to see a break through $1.2041 to complete a bullish inverse head and shoulders formation. Until that occurs, there is still a good chance we could see another move lower for the pair,” says Mahony.

Therefore those with large GBP into EUR payments due in 2017 would do well to scribble this point down as when it is cleared the outlook could be considered to have finally turned bullish and it would be worth holding on for further gains.

With regards to the GBP/USD exchange rate, Mahony notes the the continuation of the long-term decline is likely at this stage. 

Again, a continuation pattern in the form of a "symmetrical triangle formation" is cited.

"For the most part this is a continuation pattern, which points towards a likely resolution of further losses. A break back through $1.2798 would provide a signal that this could be over, yet for now we have seen little to say that this pair is on the cusp of a rally," says Mahony.

Pound has Breathing Space

The Article 50 letter was delivered to the European Council President Donald Tusk at 1130 GMT on Wednesday to formally start the process for the UK exit from the EU.

Donald Tusk has said that within 48 hours of the UK triggering Article 50, he will present the draft guidelines to the EU council (27 member states).

However, there will be some time before the 27 member states formally agree on the guidelines for talks as each state has different priorities.

"In our view, EU council is likely to agree on guidelines around June which will be better for the negotiations on both sides as the French elections will be out of the way," says Steve Jarvis, Chief Technical analyst at TraderMade Systems Ltd.

Jarvis expects GBP to improve because the process to negotiate Brexit is a slow one and we don't expect any immediate reaction from the EU over the coming weeks.

"On the UK front, the GBP is correcting on risk aversion but given that the UK government has already published its positions in a whitepaper, we don't expect any real impact on GBP from UK side. For the same reasons, the EUR is also unlikely to be impacted by Brexit news over the short-term as well," says Jarvis.