Expecting a Continuation of the Pounds Move Lower Against the Euro

The consolidation pattern that we have witnessed in the GBP/EUR exchange rate over March must ultimately come to an end. Here is why we believe the next big move will be lower.

The heavy sell-off in GBP/EUR in January and February looks to have found a bottom in the 1.25-1.26s and sellers look unwilling to push the pair lower. 

Our analysis suggests for now the consolidative trade is warranted as the move lower has attained several notable targets.

For starters, both the 200-week and 50-month moving averages lie at the current lows, at 1.2640 and 1.2625 respectively. 

We believe these strong technical levels will likely provide support to the exchange rate as buyers tend to cluster at these levels in anticipation of the failure of the move lower.

The pair has also reached the 61.8% extension of the height of the head and shoulders pattern at the highs extrapolated down, another reliable technical observation that had us calling a cessation of downside pressure.

Latest Pound/Euro Exchange Rates

	Live: 1.146▲ + 0.15% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.107 - 1.1116
**Independent Specialist	1.13 - 1.1345 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

A head and shoulders pattern occurs at the end of an up-trend and is a sign the up-trend is going to change to a down-trend.

It forms when the market rises, making a high (left shoulder), falls back, rises again making another higher high (the head) falls back and makes a lower high (right shoulder) before capitulating and breaking down.

The minimum target for the move lower is at the 61.8% extrapolation of the height, which has already been reached.

The next substantial move for the pair should come when a breakout occurs from the box-shaped sideways pattern.

A move well below the lows and the S2 monthly, confirmed by a break below the 1.2400 level would probably indicate a continuation down to 1.2280, whilst a break above 1.3050 would probably confirm a move up to 1.3220.

Given the trend before the box formed was bearish, there is a bias to a continuation lower, since the medium term down-trend remains intact as long as price doesn’t break-out above the box highs at 1.3050.

Fundamental Risks Promise More Weakness

The technicals indicators we have discussed thus far are arguably a mirror to the fundamentals underpinning demand for the pound and euro.

For sterling there is only one story at present, and that is the EU referendum. The uncertainty posed by a UK exit from the Union is a difficult one to price by currency markets, and currency markets hate uncertainty.

Nevertheless, the relative stability seen over March in the GBP to EUR exchange rate suggests markets believe sterling is trading at levels the reflect the assumption that the 'In' vote will carry the day. 

We see this as being complacent though, particularly as polls are moving in favour of the 'Out' vote.

The latest poll from Ipsos MORI showed 49 pct would vote to remain in the EU at the referendum, 5 pct less than in a similar poll in February.

The poll said 41 pct of respondents would vote to leave, up from 36 pct last month.

If markets believe there has been a tangible shift in favour of an EU exit we believe this would form the fundamental catalyst required to trigger sterling's next big move lower.

The problem we have is that predicting the timing of such an event is virtually impossible.

As such, those with an interest in this market should be primarilly focussed on managing risk and not holding out for unrealistic targets to the the upside.

Ensure your broker has set a stop loss at around 1.25 because the next attempt at this level could fail.

Euro Boosted by German Inflation Data

The euro is also starting to benefit from signs that the European Central Bank's extraordinary actions are starting to work.

Eurozone business and industrial confidence improved in the month of March but most importantly inflation rose 0.8% this month in Germany, which was double the previous month and higher than expected 0.6%.

Prices are beginning to rise, a sign that the ECB's efforts could finally be paying off. Importantly, for foreign exchange traders it suggests that the need for the ECB to introduce forther EUR-negative policy measures has diminished somewhat. 

Data will take on increased importance for the rest of the week.