Momentum Indicators Advocate for Further Euro to Pound Exchange Rate Gains

The EUR to GBP conversion remains subject to a suite of strong momentum signals that are advocating for further gains in the exchange rate.

Those transferring money to the United Kingdom are doing so from the best exchange rate levels in a year thanks to the strong momentum baked into the EUR/GBP.

The EU summit on the UK's future membership of the bloc could yield some pro-sterling surprises, but expect gains to be fleeting.

"EUR/GBP remains subject to the EU summit. After a late night, talks resume at 9CET. There is outside risk of a better deal being announced, e.g. limitations on benefits for 13 rather than 4 years,  but any dips in EUR/GBP to the 0.7650/7700 area tentatively look a buy ahead of a difficult 4 months of campaigning," says Chris Tuner, Global Head of Strategy at ING in London.

The longer-term technical structure suggests that those willing to take the risk and wait for an even stronger euro will be rewarded as momentum indicators observed in our technical studies are advocating for further gains.

According to analysts watching the EUR to GBP conversion at Lloyds Bank, “the core trend from 0.7000, which started last year remains intact.”

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.

 

That said, those hoping for a stronger euro should remain vigilant as to what is a realistic achievement as trends don't last forever and currencies don't move in straight lines.

There are stumbling blocks along the way which could trip up euro bulls in their quest higher. Lloyds warn that the single currency must “break up through 0.7895 to suggest a further extension into more important long-term resistance in the 0.80-0.82 region.”

Historical precedent tells us there is strong resistance at 0.8066 which could well cause a degree of profit-taking amongst market participants should it be attained.

0.8066 is therefore a suitable realistic target in the long-term which equates to 1.2397 in pound to euro terms for those who are watching the pair from the other angle.

All Eyes on EU Leaders Summit

Brexit risk remains a key theme for the pound, we have argued that it has created a vacuum in which even a touch of push-back from other currencies has resulted in outlandish downside moves in the British pound. 

With the topic in mind readers should be aware that sterling could be rocked by rumour and counter-rumour as the EU leaders’ summit in Brussels gets underway late on Thursday.

"The market has dropped into an important area of short-term support around 1.4230/1.4200 as we head into the EU summit. While we cannot predict what deal PM Cameron is able to walk away with, we do have key levels to manage risk around," says Robin Wilkin at Lloyds Bank concerning the headling GBP/USD exchange rate.

Euro Longer-Term Outlook Could be Undermined by ECB Minutes

One issue to watch out for with regards to the shared currency's future trade profile is potential action at the ECB.

The minutes from the European Central Bank's (ECB’s) January meeting came out on Thursday and served as a potential stage-setter for strong stimulus as soon as the bankers’ next meeting on March 10.

"The minutes flagged greater risks to the 19-country economy from global turmoil and weak oil prices. A reminder of the bloc’s weak fundamental shape, coupled with a tentative recovery in risk sentiment, has worked against the euro, capping its upside," warns Western Union's Joe Manimbo.

For the various scenarios open to the ECB's team at their March 10 meeting, please see our assessment here.

Will the Euro Find Further Support from the Global Market Sell-Off?

We wrote that the trend favouring further advances in the EUR/GBP remains technically valid.

Of course such a trend can only continue should the fundamental mood music be supportive.

Western Union's Manimbo alludes to the importance of stock markets as a source of euro fuel - when markets are selling off the shared currency finds buyers.

BNP Paribas research shows that in 2015, eurozone investors purchased net EUR 372bn of foreign debt, accounting for 80% of the total EUR 475bn of debt outflows.

Over the same period, the eurozone’s current account registered a net inflow of EUR 311bn.

Therefore, in 2015, eurozone investor purchases of foreign debt alone exceeded the current account surplus by EUR 61bn. Now what if European investors sold those investments and repatriated the currency?

If you consider this question you can understand just how significant the upside pressure on the euro grows when market sell.

The question then is whether or not the recent risk-off market conditions have passed.

"For now this certainly feels like a small relief rally after central banks showed their intention to do more, rather than the end of the recent bout of risk aversion. Certainly many of the current news stories are still focused on concerns around China and credit markets. Time will tell but for now there has been some respite," says Jon Pryor at Investec.

A trigger to watch is the oil price, so often a source of previous stock market declines.

"Markets remain sceptical oil producers will agree to meaningfully reduce supply, so a sustained rally in oil prices (and the inflationary lift it would bring) would more likely come from governments enacting stimulative fiscal policies that increase demand for oil. The market awaits that penny to drop," says Pryor.

Outlook for the Euro Today

The impact on bank margins of a further deposit rate cut must be causing some headaches for ECB policy makers. ECB minutes released yesterday strongly hinted that the ECB is prepared to act in March and also temporarily accept an upside over-shoot in inflation.

For today, the US CPI release and news from the EU summit in Brussels will buffet the EUR via EUR/USD and EUR/GBP respectively.

"We tend to favour EUR/USD downside today, towards  the 1.1000/1050 area, on the US CPI number - but it is a low conviction call. EUR/GBP remains subject to the EU summit," says Chris Turner at ING.

After a late night, talks resume at 9CET. There is outside risk of a better deal being announced, e.g. limitations on benefits for 13 rather than 4 years,  "but any dips in EUR/GBP to the 0.7650/7700 area tentatively look a buy ahead of a difficult 4 months of campaigning," says Turner.