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British Pound Tipped to Remain in Control of Euro Near-Term, but Heavy Downside Risks Remain an Ongoing Concern

British Pound

Image © SlayStorm, Adobe Stock

 

Pound Sterling has advanced against the Euro for six days in succession now, rising from a low at 1.1152 on March 7 to 1.1290 at present.

The Pound-to-Euro exchange rate's ascent has been modest, with a string of positive developments regarding Brexit and the Spring Statement which hinted at an imminent end to fiscal austerity proving supportive,

And we could see more near time gains we are told.

For the Euro, "momentum remains bearish" against the British Pound according to Robin Wilkin, an analyst who sits on the Global Cross Asset Strategy desk at Lloyds Bank's commercial banking unit.

Wilkin has analysed the Pound-to-Euro exchange rate in light of the Pound's successful attempt at staying afloat at the lows it tested in the 1.1148-1.1074 region last week.

This Pound's resilience is seen as indicative of Sterling's robust nature at these levels but Wilkin notes that substantial gains might be hard to achieve owing to resistance lying in the 1.1260/1.1274 region.

GBP EUR exchange rate levels

 

Above: The two key short-term levels identified by Wilkins. Note how Sterling is indeed facing resistance at the 1.1274 level!

'Resistance' refers to a level that the exchange rate is likely to struggle to breach as historical precedent shows traders tend to offload Sterling in this region.

But, should this pivot be cleared the analyst sees "a move through there adding further conviction" to the British Pound's recovery higher.

Other key stumbling blocks in any move higher are seen lying at 1.1350, 1.1430 and the 1.15 range highs.

Analyst Lucy Lillicrap at foreign exchange brokers AFEX says the exchange rate remains trapped in a "choppy holding pattern either side of 1.1300 or so".

"Recent weakness duly uncovered good support toward the lower parameter from where another recovery is underway but supply will probably emerge toward this effective pivot point again," says Lillicrap in a currency briefing released at the head of the week.

Pound Sterling Live technical analyst Joaquin Monfort notes the exchange rate has to get over some short-term obstacles with the next immediate focus for traders seen at 1.1300 - the pivot identified by Lillicrap.

Monfort notes at this level the 50-day moving average can be found which is typically a tough nut to crack from a technical perspective.

Like Wilkin, Monfort says 1.1350 is the next notable level after that as, "a break above 1.1350 would probably be required for more confidence," says Monfort, who also places a range high target at 1.15.

The GBP/EUR exchange rate recently decline declined to a low of 1.1148 but then bounced back after the Euro sold off in the wake of the European Central Bank's March monetary policy meeting where inflation forecasts for 2019 were downgraded in a move that warned traders the Bank will remain cautious on ending its quantitative easing programme.

The outlook for the Euro largely rests with the timing of the end of the ECB's quantitative easing programme and the start of interest rate rises. For now, it appears the ECB is in no rush to bring these dates forward and Euro bulls will likely have to exercise caution.

Speaking in Frankfurt mid-week, ECB President Mario Draghi hit the Euro after telling an audience now was not the time to rush forward changes in policy.

Draghi told The ECB and Its Watchers XIX Conference that:

- Eurozone Inflation is on track to move higher in line with expectations
- Asset purchases (quantitative easing) remains necessary
- Inflation adjustment would end quantitative easing
- Markets must be patient on policy

"it confirms the ECB is in no hurry to lift interest rates after they finish the QE tapering program in September. At this stage we anticipate the ECB will gradually raise deposit and refinancing rates from Q2 2019 onwards," says Richard Grace with CBA.

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Big Downside Risks Remain an Headache

Beware though, Wilkin's technical studies do suggest that a break below 1.1148/1.1074 "would trigger a more significant breakout" to the downside with 1.09 being the next major target.

Indeed, the long-term view maintained by Wilkin is that a decline to the 2008 lows in the vicinity of 1.02 cannot be ruled out. But it is also noted that the risks of such a degradation in Sterling's fortunes have become increasingly unlikely of late and the risks continue to diminish the longer the exchange rate remains above the 1.0752-1.03 range.

Fundamental analysis from banking giants Deutsche Bank and HSBC have meanwhile tipped the British Pound to steadily weaken versus the Euro over the remainder of 2018. Both banks forecast the Pound-to-Euro exchange rate to bottom at the August 2017 lows at 1.0750 with Deutsche Bank saying the broader Euro recovery remaining a dominant force in global FX.

HSBC meanwhile believe political concerns pertaining to both domestic UK politics and Brexit will continue to hamstring Sterling. "GBP is facing renewed political pressure and it is difficult to see how this pressure eases," says analyst Dominic Bunning, a strategist at HSBC's London headquarters.

Concerning ongoing Brexit negotiations Bunning notes "there still appears to be a wide divergence of views between the various players involved" and the UK must provide real detail "to make policy workable and enforceable and to give businesses time to plan their strategies."

The Pound-to-Euro exchange rate broke back down to November 2017 lows in early March amidst the emergence of fresh nerves pertaining to Brexit with early-March news-flow causing concern. Fresh lows were achieved on March 07 when the European Union revealed it is seeking a Brexit trade agreement involving no tariffs on goods, close cooperation on defence, security and policing but a limited services agreement.

This suits the strengths of the EU which enjoys a surplus in the trade of goods with the UK while disadvantaging the UK which enjoys a surplus in the trade of services with the EU.

EU Council President Donald Tusk laid out the plans in a speech in Luxembourg with the aims of offering further details on the EU's negotiating position on Brexit.

The UK's financial services sector therefore looks set to be a big loser of the EU's position, should the UK fail to negotiate a better deal.

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