Euro to Pound X-Rate's Appreciation to Slow, But Increasing Risk of Reversal Lower

Despite the Euro hitting its best exchange rate against Sterling in years, indicators suggest the EUR/GBP rally could be losing strength and a reversal may be on the cards.

The EUR/GBP pair has risen doggedly in the first half of August and allowing it to record its best exchange rate since 2013 at 0.8726.

At the time of writing the pair has fallen back below 0.87 as the British Pound finally gets some wind in its sails in the form of stronger-than-forecast inflation data.

The ONS reports annualised CPI rose 0.6% in July, ahead of economist estimates. 

All the various components of the price data confirm the UK faces a future of higher inflation and markets have responded by bidding the Pound higher. 

The decline in EUR/GBP fits in neatly with our forecasts made ahead of the week.

We believe there are signs that the pair may be reaching a ceiling and could be set to correct back in the near future.

The view has been reinforced by studies conducted by Commerzbank’s Karen Jones who has cited evidence in the Demark Countdown indicator which has reached a 13 count on the daily chart, which means the up-trend has reached an exhaustion point, and there will now probably be a correction.

This combined with the Elliot Wave count, which is showing the pair in probably in its fifth and final wave up from the late May lows, is another sign the up-trend could be nearing a ceiling:

The pair has exceeded its previous 0.8628 highs which means it has achieved the minimum expected attainment for a wave five, implying that wave may be near an end.

Idealy, a bearish reversal signal from price action, either in the form of a candlestick reversal pattern or some other reversal, would be needed for confirmation that wave five had finished as final wave fives can extend a long way.

Since a bearish reversal from price action is still missing, however, it is too early to call a top.

if there was a correction, the lowest it would be forecast to fall, would be to the 0.8335 swing lows.

The bearish divergence between price, which has exceeded its July 0.8628 highs and the MACD momentum indicator which has not exceeded momentum at the July highs, is evidence the most recent rally is vulnerable to a breakdown.

Nevertheless, in the absence of a bearish turn from price action to confirm all these bad omen, we are forced to stick with a cautiously bullish forecast. 

The following chart illustrates that while the pace of appreciation in EUR/GBP is slowing, it could prefer to take a more pedestrian grind higher:

The next target higher, agreed by both Swissquote’s Yann Quenlann and Commerzbank’s Jones, lies at 0.8815.

Such a move, however, would require a strong bullish break above 0.8700-15 for confirmation of an extension higher.

Latest Pound/Euro Exchange Rates

	Live: 1.1459▲ + 0.14% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1069 - 1.1115
**Independent Specialist	1.1299 - 1.1344 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

EUR to Retain Strength on Current Account Surplus say Morgan Stanley

From a fundamental perspective, we are told to expect the EUR to remain supported as the Eurozone's current account surplus makes a strong contrast to the UK's current account deficit.

The current account is a reflection of a country's trading position with the rest of the world and traditionally would be derived from the mix of imports vs exports.

A country in surplus would tend to be a net-exporter while also maintaining a low debt liability with the rest of the world.

The results from a German ZEW study showed that EU banks have larger capital shortfalls than that indicated by the official EBA stress test.

This supports the argument made by some analysts that the Eurozone's financial institutions are unable to export long-term capital due to their weak balance sheets.

"This results in the commercial demand for EUR from the EMU's rising current account surplus dominating, helping the EUR stay supported," says Charles Rubenfeld at Morgan Stanley in a strategy note to clients.

Morgan Stanley say they like buying EUR against USD and particularly against GBP.