British Pound Outlook Against Euro, Dollar Improves Aided by Deutsche Bank and Commerzbank Share Price Recoveries

Pound Sterling ended the week gone by on a positive footing thanks to a recovery in the Deutsche Bank share price but latest CFTC data confirms markets remain negatively aligned against the UK currency

• Pound to Euro exchange rate today (1-10-16): 1.1548
• The Euro to Pound Sterling exchange rate today: 0.8665
• The Pound to Dollar exchange rate today: 1.2980

GBP outperformed the Euro and Dollar over the course of the week ending 30th September thanks to a steady recovery in the Deutsche Bank share price on one side and by some good domestic data on the other.

Furthermore, the currency was aided by an improving technical picture, as discussed further on in this report.

The 'risky' Pound has shown over the past two weeks that it is highly sensitive to negative investor sentiment; particularly that related to concerns over the health of Germany's Deutsche Bank, and now Commerzbank.

The UK's large current account deficit leaves the currency highly dependent on foreign exchange inflows to remain supported and when market sentiment sours that supportive inflow tends to fade.

Almost counterintuitively, the Euro tends to benefit as global investors liquidate investments and repatriate capital.

Friday the 30th of September got off to a torrid start for Deutsche Bank which opened below €10 a share for the first time in its history.

Sterling was understandably under pressure as a result owing to its correlation to risk.

However, shares in Deutsche steadily rose through the day to close at €11.57 - a 6.39% advance that aided Sterling to close the week on a strong footing.

The currency outperformed both the Euro and Dollar on the week.

Latest Pound/Euro Exchange Rates

	Live: 1.1452▲ + 0.08% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1063 - 1.1108
**Independent Specialist	1.1292 - 1.1337 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

GBP Outlook Tentatively Improving

Despite recent declines, Sterling can count on the solid support found at recent support levels.

Support at $1.29 for GBP/USD and €1.1520 for GBP/EUR have proven sturdy and buy time for the Pound to consolidate its Brexit-induced retreat.

But since its underlying bias remains bearish, Sterling rallies are seen susceptible to giving way to renewed selling.

Nevertheless, one analyst tells us GBP could be about to rise after its long battering, as price action and momentum indicators turn up and test key chart levels, particularly on GBP/USD and EUR/GBP.

“Whilst it may not be something to put the house on, I have noticed that in the past day or so, the outlook for sterling has begun to improve across some of the major crosses,” says Richard Perry at Hantec Markets.

Tepid strength is showing on the EUR/GBP, GBP/JPY pairs and also to an extent on GBP/USD.

“The market has been mildly recovering back towards the three-week downtrend which is today around $1.3040," says Perry of GBP/USD. "With rallies seen consistently as a chance to sell, normally I would be advocating the next sell signal."

However, the improvement is coming across with a tick higher on the momentum indicators he says.

The stochastics momentum indicator looks like it is about to turn up.

Perry notes how the exchange rate is trying to break above a key trend-line for the short-term trend on the hourly chart at 1.3060:

This is set to be a key battle-ground for the pair in the future.

If the exchange rate managed to break above that level, indicated by a move above 1.3120, Perry says it would really start to suggest, “bulls were really gaining momentum.”

As far as the possibility of downside goes, Perry says that a break below 1.2977, would be indicative of more downside to come.

“Yesterday’s low at $1.2977 is near term supportive and a break below would ruin a sequence of higher lows on the hourly chart.”

Pound Defends Ground Against the Euro

Perry backs up his assertion that the Pound could be about to start to rise by arguing that the EUR/GBP pair may be peaking. (A view disputed by strategists at Credit Suisse).

“With a pullback from the key August high at £0.875 this week, is Euro/Sterling topping out again? The three week push higher formed a narrow and well-defined uptrend channel however, a strong bear candle on Tuesday was followed by a doji candle yesterday,” says Perry.

He sees pressure being placed on the trend channel higher, which could result in a breakdown.

With momentum indicators such as stochastics also turning down the evidence is growing to suggest the exchange rate may be getting ready to break lower.

“The momentum indicators are also losing impetus in the rally, with the Stochastics crossing lower for a confirmed sell signal, just the third such signal in the past three months. Each of the previous confirmed Stochastics sell signals have called a corrective period for the pair. “

Hantec’s Perry concludes that bears could be increasingly trying to ‘take control’ and push the pair lower.

“Watch for continued breakdown of the channel, whilst the bears would be grabbing control on a breach of the support at £0.8560.”

Pound to Press Lower Over Coming Months

The UK has yet to even begin it’s divorce with the EU and many uncertainties lie ahead.

This is keeping Sterling under pressure and underlying investor positioning overwhelmingly suggesting the currency will fall further.

"We expect good support for Sterling at its post-Brexit low of 1.28 against the U.S. Dollar and 1.1450 against the Euro and that U.S. and Eurozone uncertainties will start to present some better opportunities for sellers of Sterling in the months ahead," says Andy Scott, economist at HiFX in London.

So the theme, it would appear, is to expect support to stay solid but that a notable break to lower levels is in the air.

Market Sentiment Towards GBP Turns Negative Once More

The US Commodity Futures Trading Commission's (CFTC) much-watched data on the currency trading community shows speculative investors have added significantly to net short GBP positions (up USD2.3bn in the week).

“Net GBP shorts peaked in August but the jump in positioning suggests a significant deterioration in GBP sentiment over the past week,” says Eric Theoret at Scotiabank.

The CFTC produces market reports to provide information to industry participants and the public about the futures and options markets.

The CFTC’s latest Commitments of Traders (COT) report covers up to the 27th of September and is regarded as the best available data on market sentiment.

Fears Over Commerzbank, Deutsche Bank Rise

Markets turned sour late on Thursday following reports that a number of funds that clear derivatives trades with Deutsche Bank have withdrawn some excess cash and positions held at the lender. 

Analysts say this is a sign of counterparties’ mounting concerns about doing business with Germany's largest investment bank.

The Deutsche Bank share price slid on the news, taking global investor sentiment, and GBP lower too.

And worryingly for Sterling, analyst Ken Odeluga at City Index in London says further falls in the share price are likely:

"We expect a harsh winter for Deutsche shares, with a steady continuation of the stock’s long-term decline interspersed with further sharp upsurges of volatility, like today’s. For the time being, we expect the stock to continue to overreact to news which would be regarded as flimsy during ‘normal’ times."

Odeluga does however say he does not think any information on counterparty risk has emerged, and he therefore discounts concerns over counterparty risk that have reportedly been voiced in parts of the financial market.

"The removed cash and positions by a minority of Deutsche Bank’s 200-plus large derivatives accounts holders are almost certainly immaterial for Deutsche Bank’s shares, except of course due to the effect on sentiment," says Odeluga.

There is the chance therefore that Deutsche share do recover at some point over coming days which should provide support for the UK currency.

Sentiment was further dented on news that Deutsche's fellow German bank Commerzbank had unveiled plans to cut up to 10 000 jobs and suspend dividends for the first time.

The move sent jitters through the finance sector and ensured the strong start to the day for global stocks, commodities and the Pound was reversed.

On Friday we are seeing European markets destined for a poor start while losses in Sterling appear to be limited confirming our other view - it will be hard to push the currency much lower than current levels.

Deutsche Bank Won't Collapse say Analysts

The big question then is whether Deutsche Bank is leading us to another Lehmans-style baking collapse?

US policymakers privately admit that allowing Lehman Bros to collapse was a bad move and not something to be repeated. 

"The ECB and related governments are aware of the potential disruption of allowing a major European Bank collapse and while they may oversee an orderly reduction in the scale of its more risky operations they are not going to allow its outright collapse," says John Meyer, an analyst with brokerage SP Angel in London.

Meyer says the problem with bailing out Deutsche is that it will need to be seen to be done on the same basis as a number of Italian banks which are seen to be in a similar crisis.

"While the situation might remind some of the Lehman Bros collapse and the subsequent crisis the bailing out of Deutsche Bank should not have such global impact," says Meyer.