Euro to Pound Exchange Rate Rate: Forecasting a Break Lower on ECB Day

The potential for an agressive suite of easing measures to be announced by the ECB on Thursday could see the EUR/GBP pair break lower.

• Watch the ECB's press conference and coverage live here.
• EUR to GBP rate at 0.7726 - where it has been for about 7 days now
• We think the pair will move lower, but extent of declines to be limited as medium-term trend is still higher

The euro to pound exchange rate is sandwiched between major support and resistance in the run up to the European Central Bank (ECB) policy meeting on Thursday.

The currency pair has been traded in an incredibly tight range for 6 days now. The last time we saw such consolidation was back in the December-January holiday when volumes were thin.

There is no such problem with volumes at the moment which tells us traders are sitting on the sidelines terrified of getting burnt by the ECB this time around.

We also note that when breakouts do occur from such periods of consolidation they tend to be agressive and far-reaching in nature.

According to the latest Reuters poll a 10 bps cut in the deposit rate is expected, taking the rate to -0.40% and an increase in monthly purchases to at least EUR 70 billion is priced into the exchange rate.

Anything either side of this will likely cause moves in the single currency. The only risk to our call is that the ECB delivers exactly what markets are saying and deliver a balanced tone at the press conference that follows. In which case, the currency pair will likely end up back where it started today's trade.

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.

 

We are Betting Against the Dominant Trend

Despite pulling-back in late February/March the euro to pound exchange rate is in a medium-term uptrend that covers a multi-week timeframe.

As such we would typicall back the euro to rise, in line with the dominant trend.

But, fundamental drivers are likely to sway the balance of probabilities, for the short-term at least.

We now believe that there is the possibility that the ECB might surprise markets by unveiling more stimulus than is currently expected, since expectations are unduly low.

“Market participants do not want to be caught wrong-footed again. As a result they seem to be more cautious now and are not as short the euro as they were before the ECB meeting. Consequently we believe that if the ECB deliver by a mix of cutting the rate, increasing its asset purchases, and clearly signal that they are prepared to do more, the euro may very well weaken tomorrow,” says Camila Viland at DNB Markets. 

PoundSterlingLive agree with this assessment and feel there is a significant chance the ECB could surprise markets with an aggressive move and push the euro lower.

The view is pertinent to the EUR/USD too, and we join a list of strategists who are betting on a negative outcome for the euro.

In addition, price action over recent days has been quite flat, screaming of the potential for a break lower:

An obvious target for such a break lies not far below, in the form of the formidable 50-day moving average, which is a line which marks the average price over the last 50 days, and is at 0.7643. The 50-day MA often provides support to price, making it more difficult for prices to break below it.

The easiest gains are to be had from the break below the 0.7690 support lows to the 50-day at 0.7643 – our best case scenario target.

This also falls in line with our bearish EUR/USD forecast to a target at 1.0700 (confirmed by a break below 1.0800). 

Although any decision by the ECB could provide sufficient impetus for price to smash through this level, it is, nevertheless too significant to ignore.

The Longer-Term Trend Will Keep Downside Limited

Regardless of the near-term reaction by sterling the pair could ultimately go higher in line with the established medium-term up-trend.

'The trend is your friend' after all!

A golden cross in mid-January, which is formed from the 50 crossing above the 200-day MA, also adds a bullish bias, although it did happen 6-weeks ago.

If the pair breaks above the current 0.7928 highs, then it will meet the R1 Monthly Pivot, a tough resistance level calculated using the monthly high, low, close and open at 0.7983.

R1 is likely to cap moves higher, limiting upside potential for the pair, but a break above the 0.7928 highs, is nevertheless still likely to reach 0.7983.

Above that, the next target is at 0.8035, where the 100% extrapolation of the height of the inverted head-and-shoulders bottom is situated and this too is likely to cap price if it does move higher.