The Euro is forecast to extend losses against the British Pound for at least one month say strategists at Standard Chartered.
The call to sell EUR/GBP comes as the exchange rate pair is seen stuck in a downtrend which has been in place since mid-March.
Over the course of the past month EUR/GBP has fallen 2.86%.
At the time of writing the Euro to Pound rate is at 0.8486, which results in a Pound to Euro exchange rate at 1.1785.
Note that our technical forecasts for the latter for a rise to 1.18 have proven correct and there is now talk of a target of 1.20 being reached.
Such technical forecasts would meld with the Standard Chartered fundamental view that markets should deliver further near-term Pound strength and Euro weakness.
“We expect the GBP to outperform the EUR over the next few weeks,” says Nick Verdi, Senior FX Strategist with Standard Chartered in their New York branch.
Stretched short GBP positioning and increasing French election risks portend EUR-GBP downside are amongst two compelling reason for markets to allow the current run in the Pound’s strength to extend.
Positioning refers to how the markets are currently betting on a certain asset - stretched short GBP positioning means markets are currently engaged in a heavy bet against the Pound that is at risk of losing momentum and even reversing as there is now a limit to the number of new entrants that are willing to join the trade and therefore keep the Pound falling.
“In the meantime, the euro-area has important risk events that could undermine the EUR, particularly in the context of short positioning that is less stretched than in the GBP versus the USD,” says Verdi. “A strong showing by Marine Le Pen in the 23 April first round of the French presidential election and a more-dovish-than-expected European Central Bank stance at its 27 April meeting could dent EUR sentiment.”
The ECB is expected to exercise caution at its upcoming policy meeting, which Standard Chartered believe should temper expectations for a more hawkish stance in the near term.
Still-low core euro-area inflation (0.7% in March) and weak earnings growth suggest that a QE tapering discussion for the Governing Council is off-limits until mid-year or beyond.
Such an outcome should keep the Euro in check.
The GBP is one of the best-performing G10 currencies since Article 50 was triggered on 29 March.
Brexit talks are expected to formally begin at the EU summit on 22 June and it would be understandable to assume that any latent strength in the Pound would be tested in the volatility that such talks present.
“We remain bearish on the GBP and the EUR versus the USD medium-term,” says Verdi.
Standard Chartered recommend that investors sell EUR/GBP on a short-term tactical one-month basis and target a fall to 0.8200. If the Euro reverses and strengthens then traders should exit the market at 0.8736 via the placing of a stop-loss.
Looking at these levels from a GBP/EUR angle, this equates to a target at 1.2195 and a stop-loss at 1.1447.
However, over coming months the Pound is forecast to come under pressure.