EUR / GBP Exchange Rate a Sell this Week with BNP Paribas

The Euro to Pound Sterling exchange rate is tipped to fall this week by strategists at French investment banking giant BNP Paribas.

Strategists have written to clients saying they favour shorting EUR/GBP ahead of several key data releases due in the UK this week.

'Shorting' is trader speak for selling a financial instrument, in this case the Euro to Pound exchange rate.

The call comes despite the Euro jumping half a percent against Sterling on Tuesday, May 16 as the Euro enjoys widespread gains on the markets.

The reasoning for the bet in favour of Sterling at the expense of the Euro comes ahead of the wage data report due out on Wednesday, May 17.

Analysts believe this will likely be the most important release for the UK economy this week.

Despite the Bank of England’s (BoE) latest message suggesting that interest rates may need to rise faster than is currently priced in by the markets argue analysts, UK front-end yields are still pricing a very dovish BoE profile.

Typically, when the yield on UK government debt rises so too does the Pound as global investors send capital into the UK to take advantage of the improved return they might receive.

The Bank of England’s May inflation report assumes that wage growth will only pick up during 2018.

“Therefore, UK rates have significant room to adjust higher for a rate hike in case there are signs of wage acceleration, which should benefit GBP,” say BNP Paribas.

BNP Paribas are therefore betting the markets are too negative on Sterling at this point and will adjust accordingly.

However, we do caution that others are not so optimistic on the trajectory of UK employment and wages. On Monday, May 15 EY reported that their Item Club are forecasting UK unemployment rising back to 5%.

This would certainly undermined the longer-term prospects of Sterling when employment and wages are considered.

That said, the BNP Paribas trade is short in duration and there is no reason to believe near-term labour market data surprises in a positive manner.

Economists also expect UK April CPI (Tuesday) and retail sales (Thursday) to rebound this week, with retail sales significantly above market expectations.

“Our models continue to suggest the GBP is very undervalued, but especially versus the EUR,” say BNP Paribas.

Another reasons to bet on a Sterling appreciation is the underlying structure of the market which continues to be heavily biased against Sterling.

We find that when markets show such a bias there is often the need for rebalancing to take place. In this instance a market betting against Sterling would need to buy back Sterling to rebalance.

The BNP Paribas FX Positioning Analysis suggests that GBP short positioning has recently been cut, but an analysis of bilateral EURGBP positioning is still showing a long exposure at +18 (scale of +/- 100).

This suggests there remains further potential for further GBP strength versus the EUR.

Societe Generale Recommend the Opposite

While BNP Paribas are advocating for a rise in the value of Sterling, analysts at fellow French bank Societe Generale are arguing for moves in the opposite direction.

This just confirms how tricky foreign exchange markets can be and readers need to balance the strength of the various arguments and also be aware that timeframes can differ.

So while one says a currency is to rise and another says it will fall, it could be that the time frames are different.

Indeed, we find Societe Generale's call is for the longer-term and their studies suggest that the pair has formed a triangle pattern the base of which at 08360 is a key level for the pair.

A break below would change the bullish tenor of the chart, but whilst the exchange rate remains above, they too stay bullish.

“EUR/GBP has been undergoing a choppy consolidation roughly within the January/March high of 0.88 and the graphical support of 0.8360/30, which also corresponds to the base of a multi-month triangle. This remains a key level, and only a break below will indicate the possibility a larger down trend. In the short term, the pair is likely to recover towards 0.8610, the 61.8% retracement from the March high, with the next hurdle at 0.88,” says analyst Stéphanie Aymes.