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Pound Sterling to be "Forced" to "new Historic Lows Again" vs. Euro says AFEX's Lillicrap

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One of the UK's oldest private foreign exchange brokers warns that the recent deterioration in the Pound-To-Euro exchange rate is likely to give way to a significant deterioration.

"The corrective structure of previous Sterling gains suggests further deterioration going forward," says Lucy Lillicrap a technical analyst with AFEX.

AFEX was founded in 1979 and exchanges currency for private individuals and corporates while also mitigating foreign exchange related risks for clients.

Lillicrap's suggestion that a deterioration is increasingly likely represents a shift away from a previously bullish stance.

Last week the analyst wrote of GBP/EUR that "more recent consolidation could of course also be used as a base/platform from which to enable fresh GBP gains over coming weeks."

The Pound now buys 1.12 Euros on the inter-bank market, where it bought as much as 1.15 on January 25, a deterioration that suggests momentum now lies with the Euro.

"Indeed at some point this macro bearish cycle is likely to force prices to new historic lows again," warns Lillicrap. "Values have also only recently failed to establish themselves back above the psychological 1.1500 level."

The analyst warns, "if psychological support at 1.1000 now fails to contain re-emergent GBP weakness prior action (since October) can be used as a top from which to attack previous 1.0750 lows more or less directly."

Pound to Euro exchange rate graph

 

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Pound Firms at Start of the New Week on Italian Uncertainty

Sterling edged higher from recent lows against the Euro at the start of the new week, apparently finding support on news that no party or bloc appears to have won enough votes in the Italian election.

Markets have been put on edge as the Five Star Movement (M5S) look set to become the largest single party with 32.22% of the vote with 99% of districts declared.

More than 50% of all voters backed the two major anti-establishment parties (M5S and The League) and both parties could form a government and have a workable majority in the Lower House.

The Democratic Party of former Prime Minister Matteo Renzi secured 18.9% of the vote, The League 17.69%, Forza Italia of Silvio Berlusconi 13.96%, Fratelli d'Italia 4.35% and Free and Equal 3.38%.

The centre-right bloc of The League and Forza Italia are looking to form a government reports suggest.

Speaking following the vote, League leader Matteo Salvini told reports that he believes the Euro "is a bad currency" and is "destined to fail" confirming to markets that the next government could deliver a decidedly anti-Euro flavour. Salvini is part of a right-wing bloc that won the most votes, but crucially the bloc did not secure the requisite 40% to take full control of the legislature.

But, a referendum over the continued participation of Italy in the single currency was “unthinkable” said Salvini also said he believes his bloc is in a position to rule.

This qualification has allowed the Euro to handle the outcome in its stride, particularly when pitted against the Dollar as the EUR/USD is quoted at where it closed the previous week at the time of writing which is around 1.2320.  

Safe-haven flows could be supporting Sterling.

Recall last week we warned that any safe-haven seeking on market uncertainty over European politics could benefit the Pound. Analysts at J.P. Morgan highlight that Sterling tends to benefit from bouts of uncertainty in the Eurozone.

“GBP behaved as an unlikely albeit intuitive safe-haven as investors took the view that whatever threatened the unity and integrity of the Euro area justified less of an idiosyncratic Brexit risk premium in GBP,” says Paul Meggyesi, vice president of global currency and commodity strategy at J.P. Morgan.

“We suspect a similar pattern would play out this time either on an MS5-led non-mainstream government or a hopelessly hung parliament that necessitates a second election,” says Meggyesi.

However, we would argue that should a stable government be formed soon the Euro will revert back to its winning ways and potentially put Sterling under fresh pressure.

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