Risk of Euro-to-Pound Rising After Sterling Short-Squeeze Wanes

euro to pound sterling exchange rate 1

The Pound Sterling rebound from its August low could be finally running out of steam, says KBC Sunrise's Research Analyst, Piet Lammens, in Brussels.

The move off the low has been referred to as an example of a "short squeeze", which is a bounce that gains added strength from the fact that many sellers are caught off guard and therefore have to rapidly close their short-bets before losing too much money.

The rapid closing gives added energy to the rebound.

However, now, "the recent sterling short squeeze shows tentative signs of slowing," said Lammens.

Recent activity shows that EUR/GBP failed to make much more headway below its existing base and GBP/USD has started to fade.

This can be blamed on creeping disillusionment following stalled Brexit talks this week, despite Theresa May's Florence speech holding out some hope of a breakthrough in the deadlock.

"The Brexit negotiations restarted, but comments from EU’s Barnier suggested not much progress despite the modestly positive comments after PM May’s speech last week," added Lammens.

27 9 euro to pound

According to the analyst, the next significant piece of data for the Pound is the CBI Retail Sales survey in September, which if positive might move the Pound higher, as it would increase expectations of the Bank of England (BOE) raising rates in November.

In the end the CBI Retail Sales survey for September, which has just been released, was very positive, showing a balance of +42% which resoundingly beat forecasts of only +19%.

The reaction of the Pound has also been positive after it rose from 1.3390 to 1.3425 in the minutes after the release.

EUR/GBP, meanwhile has fallen from 0.8770 to 0.8750, follwoing the data release.

Yet despite the positive Retail sales data KBC Sunrise is still bullish for EUR/GBP in the medium-term, clearly seeing the loss of momentum in the short-squeeze move as precursoring an eventual resumption of Sterling's decline.

"Medium term we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist," said the broker.

Nevertheless they acknowledge too that the September BOE rate meeting, with its hawkish bias, was a game-changing moment for the currency and put a "solid floor for sterling ST term."

They advocate monitoring the current EUR/GBP correction with a view to buying when or if the pair turns around again, highlighting the underpinning support at 0.8743 and 0.8652, "which we consider difficult to break."