1.09's Possible for GBP/EUR Exchange Rate says AFEX's Lillicrap
- Written by: Gary Howes
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- Foreign exchange market snapshot:
- Pound to Euro exchange rate today: 1.1333, down 0.11% on the day
- Euro to Pound Sterling exchange rate today: 0.8824
An uncompromising technical assessment of the British Pound suggests the period of stability seen against the Euro over recent weeks is transitory and some significantly lower levels could be tested.
Technical analyst Lucy Lillicrap at Associated Foreign Exchange warns that downside pressure is likely to remain a feature over the next few weeks/months.
Technical analysts such as Lillicrap look at the structure of the market for clues on the outlook as often foreign exchange is bought and sold at various prices that have an established historical precedent.
For instance, many see the 1.11 level as being a tough one for the Pound to fall below owing to the markets habit of buying Sterling at this point.
It is why analysts - fundamental and technical - see it as a line in the sand that the currency won't go below without a battle.
Above: The long-term chart for GBP/EUR is a story of key levels that technical analysts can use - with varying degrees of success - to predict future moves in Sterling.
While 1.11 should be on everyone's radar, be aware that a break here could well invite a quick decline to sub-1.10.
Lillicrap has also looked at the market in EUR/USD and GBP/USD for clues on the cross that is GBP/EUR.
“With both component currencies of this cross pair at different points in their broad cycles (EUR/USD prices look to have bottomed whereas GBP/USD values have not) downside pressure is likely to remain a feature over the next few weeks/months,” says Lillicrap.
For now at least some support is apparent toward 1.1250 and while unbroken Lillicrap says an intermediate range effectively persists.
“However rebounds are considered broadly corrective and strong resistance awaits at 1.1550 then 1.1700 areas,” says the analyst. “Looking ahead if 1.1245/55 support gives way an extension to 1.1100 and 1.0950 is readable next.”
As mentioned, AFEX believe GBP/USD has further downside and this could impact on the performance of the broader Pound Sterling complex.
“Shorter term trends remain negative and indeed an argument could be made for current GBP weakness being part of a broad sell-off back to and then below 1.1800 eventually,” says Lillicrap.
On this basis prices have already posted an intermediate corrective top at 1.3050 and subsequent rebounds should now be contained by 1.2975/85 resistance.
“To encourage a directly bearish view the market will still need to penetrate 1.2615/25 support (thus targeting 1.2450/1.2275 next). However only an extended basing exercise and subsequent breach of 1.3450 is considered overtly positive instead,” adds the analyst.
Of course much of this view on Sterling-Dollar relies largely on the assumption that the cyclical uptrend in the Dollar restarts.
The Dollar has been rising since 2012 as the US economy leads the world in exiting the great financial crisis of 2008, but there are signs this trend might be stalling as the rest of the world catches up.
The Dollar trends in multi-year cycles and there are suggestions that the third upswing of the post-Bretton Woods era has come to an end.
If so, we would question whether or not that big loss in GBP/USD is actually likely.
Politics Remains Key for Sterling
Ahead of the state opening of parliament the Pound is seen treading water with traders keen to gauge how long Prime Minister May can last in her position.
The Queen’s speech will give investors an idea of what policies the Government are going to try and push ahead with – that is, if they can form a government – and which they have had to abandon after the shock erosion of their parliamentary majority.
“While the speech itself may have limited impact on the pound unless there are any surprises, next week’s MP vote will be key. A failure to win the support of a majority of MPs could be seen as a vote of no confidence," says Alexandra Russell-Oliver at CaxtonFX.
The analyst says such an outcome would increase political uncertainty in the UK during the initial stages of formal Brexit negotiations and could add to pressure on a currency that is already vulnerable to downside risk.
"If the process goes smoothly, the pound could breathe a sigh of relief as one element of uncertainty is eliminated,” says Russell-Oliver.
