GBP to EUR Conversion Finds Solid 200 Day MA Support
The pound and euro have been impacted by recent comments on monetary policy by key members at the Bank of England and European Central Bank while a technical support zone looks set to question any further strength in the EUR for the time being.
A strong start to the week for sterling has given way to declines as the Bank of England's most notorious Hawk says the Bank has the ammunition in store to effectively ease policy further.
The news comes just as the European Central Bank President Mario Draghi undermined recent euro strength in a speech to the European Parliament. Draghi used the now familiar line that his Bank stands ready to use whatever tools it has at its disposal to aid the Eurozone's recovery.
"The euro and sterling were weighed by comments from the ECB President Mario Draghi and Bank of
England Monetary Policy Committee member Ian McCafferty," note Lloyds Bank in foreign exchange briefing, "the Bank of England’s most hawkish member, Ian McCafferty, also made surprisingly ‘dovish’ comments, indicating that there is scope to cut interest rates."
McCafferty said his team were "not out of ammunition" if the economy weakened and needed stimulating.
"The fact that McCafferty has shifted from voting in favour of raising rates, to keeping them on hold and talking about additional measures the central bank could deploy, indicates just how much the policy debate has shifted. Given the incredibly volatile state of financial markets and weakened state of some economies, it’s not all that surprising that they’re steering away from raising rates in the near term," says Andy Scott, economist at HiFX.
There’s a lot of uncertainty over whether advanced economies can maintain the still moderate growth rates seen in recent years, in the face of slower growth or recession in emerging markets.
Pound to Euro Forecasts: The GBP Finds Strong Support
From a chart-watcher’s perspective there is now a relatively higher possibility that the GBP/EUR pair may have found a bottom – however temporary.
And this dove-tailing with a relatively important set of economic data releases for the pound this week could explain where the catalyst for such a move might come.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
In addition, a cooling in Brexit concerns, prompted by news HSBC will not be relocating out of London while the U.K’s attorney general favours a Brexit may have buffered markets to the associated downside risk.
GBP/EUR reached new lows of 1.2661 last week, which is only 30 points above the major 1.2630 support level at the 200-week MA (our most recent downside target).
The weekly chart shows the recent lows almost touching the 200-week Moving Average, which would be expected to provide strong support for the exchange rate.
The exchnage rate came so near to touching the 200-week that it more-or-less qualifies as a touch even though it remained 30 points above.
The pair has also reached another major target at 1.2710, generated by extrapolating the height of the head-and-shoulders pattern down by 61.8% from its neckline (at 1.3360); this is considered the minimum expected reach of the pattern, and it has now been met and surpassed by 50 points.
Therefore, bottom line - having fulfilled one target and almost fulfilled another, there is now an increased chance it may have bottomed.
Upside, so far, has been limited, however, and on the daily chart, the pair remains trapped inside its descending channel.
A break above 1.3100, would probably be required to confirm a bullish extension up to 1.3200, which is close to a tough ceiling of resistance from the 1.3242 monthly pivot and the 50-day MA close by.
Despite the two major downside targets having as good as been met, the trend down is still technically intact, and a decisive break below the 200-week MA at 1.2630, would confirm a continuation down.
A move below the 1.2500 would probably extend to a 1.2310 target, which is calculated by extrapolating 100% of the height of the H&S down.
According to Lucy Lillicrap at brokerage Associated Foreign Exchange, pressure on the pound is easing:
"Despite the presence of a broader negative structure some evidence exists to argue the current bear trend from December is maturing.
"Momentum, and thus downside pressure, looks to be gradually diminishing and although Sterling prices could "stair-case" their way somewhat lower over coming sessions the market looks unlikely to stray far from 1.3000 until an interim correction has been experienced.
"Support now begins around 1.2650 then 1.2525 and effective resistance meanwhile appears thin until 1.3025/1.3150 areas again initially."
