Pound to Euro Looks Likely to Extend its Uptrend After the BOE Leaves Rates Unchanged

GBP/EUR pushed higher following the BOE’s endorsement that the status quo was adequate. Could the pair now build on these gains and go even higher?

Sterling gained a substantial boost after the recent meeting of the Bank of England (BOE) on Thursday July 14. 

Investors had been expecting the BOE to cut interest rates from their current 0.50% level to 0.25%, and possibly even increase quantitative easing (QE) too.

In the immediate aftermath of the Brexit vote on June 30 the governor of the BOE had said he would almost certainly now be cutting rates or using some other stimulus measures such as QE to ensure the economy was buffered against the potential negative effects of Brexit.

However, in the end, he and the rest of the MPC (well all bar one) were not moved to press the button on more stimulus.

This was seen as an endorsement of the economy -  and indeed the July summary and minutes do emphasise how well the banking system had held up after the shock. Most financial markets too have recovered.

That is why sterling rose so rapidly in the minutes after the BOE meeting decision.

The fact the BOE stated they would still be probably cutting rates and possibly increasing QE at their August meeting took the edge of the rise, however, the currency has still kept hold of at least half its gains.

Below we look at the charts for the pound's major pairs -  GBP/USD, GBP/EUR and EUR/GBP and make forecasts using technical indicators.

GBP/EUR

The pound to euro rate spiked higher following the release of the BOE’s monetary policy decision on Thursday, and as a consequence the chart now looks more likely to include further rises in the near-term.

This comes despite the dominant down-trend established after the referendum result.

The MACD indicator in the bottom pane is also confirming that the pair could be about to start a trend higher, after the MACD line crossed its signal line.

If the exchange rate can manage to move above the 1.2099 post-BOE meeting highs - then that will open the way to a stronger recovery up to the monthly pivot PP at 1.2350 – a level where the rate often stalls or bounces, due to traders clustering counter-trend orders around it.

GBP/USD

The pound to dollar rate is also showing potential for more gains after forming what could be a small inverse head and shoulders (H&S) reversal pattern at the lows.

This is despite the fact the exchange rate appears to be in a strong down-trend longer-term.

Much will depend on how resilient the economy is in the aftermath of the UK leaving the EU, which will take time to assess, however, today’s BOE decision to not cut rates was a form of endorsement of the economy, which is why sterling rose so strongly afterwards.

But back to the technical analysis. There is a strong possibility that a break above the neckline of the inverse H&S between 1.3450 and 1.3500 would signal a move up towards the next target to the upside at the monthly pivot (PP) at 1.3800.

Again, MACD crossing its signal line is another signal the pair might be extending higher.

Commerzbank's technician, Karen Jones is also bullish:

“This correction higher looks set to extend further than we originally thought and we should allow for a rally to 1.3534 and potentially 1.3638, the 0.382% retracement of the recent sell-off.”.

EUR/GBP

Whilst the initial reaction on seeing the chart is that the up-trend is the dominant trend, we actually see more downside on the horizon, with a possible break below the post-BOE lows at 0.8258 confirming a continuation down to the monthly pivot (PP) at 0.8110.

The monthly pivot is likely to slow further losses as it is a level traders often use to reference the market, and therefore attracts a lot of supply.

Karen Jones is also bearish, remaining “downside corrective.”

“EUR/GBP is near term downside corrective and the Elliot Wave count on the daily chart is pointing to a 0.8229/0.8110 retracement prior to recovery.

“Intraday rallies are likely to struggle at 0.8445/80, and we will remain downside corrective whilst capped here.”