GBP/EUR Exchange Rate - Relief, But it Could be Fleeting
The GBP to EUR rate continues to fight out a base formation at above 1.30 as the multi-week sell-off becomes overdone allowing bargain hunters to pick up cheap sterling. The trigger to the move was the European Central Bank (ECB).
The pound to euro exchange rate bounced higher into the weekend after Mario Draghi hinted at the possibility that the central bank might announce more easing at its March policy meeting.
GBP/EUR had been testing the key 1.3000 psychological level over the course of the week, with a view to breaking down to the next cluster of support in the 1.26s.
However, the admission by Draghi that the governing council would be “reviewing and reconsidering monetary policy,” at the next meeting sent the euro crashing lower.
In a key statement which he repeated for emphasis, Draghi said: “It will therefore be necessary to review and reconsider our monetary stance at our next meeting in March, when our next macro-economic projections will be available.”
With reference to inflation he said it had once again started to fall below the expected trajectory.
He added that in view of recent economic developments the ECB would be keeping interest rates at or below their current level for an extended period of time.
Latest Pound/Euro Exchange Rates
  | Live: 1.1448▲ + 0.04%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1059 - 1.1105 |
**Independent Specialist | 1.1288 - 1.1334 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Turning to the charts now, we see that there had already been technical indications of exhaustion after GBP/EUR pushed below the lower boundary of the down-sloping channel temporarily on wednesday in a long red sell-off candle.
This was followed by a hammer candle and finally, crucially, a fundamental driver appeared in the comments from Draghi on Thursday.
Confirmation of more upside would come from a break above the 1.3188 highs, which would probably lead to a target at 1.3267 where the S2 Monthly Pivot is situated.
Nevertheless, until that break comes the trend must still be deemed to be bearish, and therefore a move below the 1.2893 lows would see downside to 1.28 initially, and then probably even lower to the 200-day MA at 1.2615.
The fact that both the BOE and the ECB are shifting their stance to a more dovish position, however, could also indicate a period of tight consolidation ahead as bank policies converge, nevertheless, there has been further upside on Friday so far signalling the recovery may be poised to extend.
Euro to Dollar
Now turning to the EUR/USD chart we can see the pair had been pressing and trying to breakout to the upside of its consoldiation, however it fell back down over 100 points after Draghi's comments.
However, it ended the day of the meeting recovering most of the lost points and forming a bullish hammer candle candle.
There is further support from the 50-day MA at 1.0827.
This seems to be signalling that the euro has successfully shrugged off Draghi's dovish rhetoric and resurrected the possibility of a breakout higher.
The Money Flow Index is showing non-correspondence with the post-ECB down-turn in price, a further bullish signal.
As I have said previously, there is much resistance above but a break above the 1.1115 highs would likely confirm clearance of that and an extension up to the aforesaid 1.1260 target.
There is a possibility that this would be the ‘C’ leg of an A-B-C corrective pattern, which began with leg A after the December ECB meeting.
The C wave should at the very least reach the 61.8% Fibonacci extension of wave A, at the expected target of 1.1260.
