"Tide Turns" for GBP/EUR Rate: Danske Bank

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The "tide turns" for the Euro say analysts at Danske Bank who are looking for the currency's recent strong run to reverse and allow Pound Sterling to recover some recently lost ground.

"Just about everything that could go right for the EUR has happened the past month. We think the EUR rally has started to lose steam," says Jens Nærvig Pedersen, an analyst at Danske Bank.

The Scandinavian lender and investment bank says the drop in the value of the Euro since last week is therefore "well grounded" and it looks for more to come.

The Euro has fallen 2.75% against the Euro since its February 02 peak at 1.1032.

The single currency has meanwhile retreated a percent from its recent peak against the Pound at 0.8978 (Pound to Euro low at 1.1138), reached on February 03.

The Euro has rallied through late-2022 and early-2023 as investors expressed relief over falling gas prices amidst elevated storage, demand reduction and additional supplies from non-Russia sources.

Further impetus was provided by the reopening of China, which is a key market for Eurozone industrial exports.

The European Central Bank's December message that it would hike rates at a faster pace than previously anticipated meanwhile prompted Eurozone yields to move higher, underscoring support for the currency.

But these positives are now well understood and accounted for by investors, leaving the Euro looking for fresh upside triggers.

Above: EUR/GBP (top) and EUR/USD. "We think EUR/USD peaked last week" says Danske Bank. As the chart correlations suggest, this could also imply a top for EUR/GBP. Consider setting a free FX rate alert here to better time your payment requirements.

Positioning is also unhelpful with bets for further Euro upside now crowded.

"Given that the market is positioned long EUR, we expect the upside for the EUR to remain capped," says Jane Foley, Senior FX Strategist at Rabobank.

Danske Bank also says it is looking for the Pound to make a comeback.

"We remain USD and JPY bulls, moderately GBP positive and EUR bears," says Pedersen. "GBP suffered a setback from both a repricing of the BoE, broad-based Euro optimism and Eurozone assets outperformance."

Given expectations for the tide to turn against the Euro, Danske Bank looks for EUR/GBP to drop again to around 0.87-0.88 on a three-month timeline, "partly driven by fading EUR optimism and partly driven still weak overall global manufacturing activity".

EUR/GBP 0.87-0.88 gives a GBP/EUR range of 1.15-1.1360. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

"We now see relative rates being more neutral for the cross going forward," says Pedersen.

Elsewhere, currency analysts at Crédit Agricole say EUR/GBP's fair value increased from 0.8749 to 0.8756 in the near-term, due to a rise in the Eurozone-UK short-term rates differential after the ECB and BoE meetings.

But this means spot (currently at 0.8884) is well above the fair value level calculated by Crédit Agricole's FAST FX model, which generates trades on perceived deviations from fair value.

"EUR/GBP is more than 2.5 standard deviations overvalued. So the FAST FX model has triggered a short EUR/GBP trade with a stop-loss of -1.92% and a take-profit level of 0.8756," says a note from the French bank.

The FAST FX model made 0.91% last week being long USD/JPY and is up 12.04% with a hit ratio of 64% over the past year.

"USD/JPY is undervalued, but short of triggering a buy trade. EUR/GBP, EUR/SEK and EUR/NOK have all become overvalued and have triggered sell trades," says Crédit Agricole.