Pound-to-Euro Falls to One-Week Low on Italian Breakthrough, Could fall to 1.10 says Commerzbank's Jones

Image © Pound Sterling Live

- GBP/EUR heading to bottom of long-term range

- But, Pound Sterling ultimately directed lower

- Fall to 1.09 not out of the question

The British Pound has fallen to a one-week low against the Euro on Wednesday, December 19 on a combination of options market demand and progress on the Italian budget.

The Euro exchange rate complex was seen moving broadly higher on news the EU and Italy had reached agreement on Italy's proposed budget, potentially closing the door on a period of angst that has kept the single-currency in check.

"A lot of hard work and negotiation went into finding solution on the Italian budget. Let's face it: the solution on the table is not ideal. But it allows us to avoid an Excessive Deficit Procedure at this stage, provided that the agreed measures are fully implemented," says Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, at the European Commission.

After lengthy negotiations, the two sides have agreed on a deficit target of 2.04% (from 2.4% originally), bringing the structural deviation down to zero (from a deterioration of 0.8pp previously). The sides agreed on more realistic GDP growth assumptions, further public real estate sales and a delayed implementation of the pension reform and citizen income to March.

"We think recent changes in the wider European political landscape were a key factor behind the Commission’s budget leniency," says Aila Mihr, an economist with Danske Bank.

"In response to the recent Yellow Vest protest, French President Macron announced a range of income boosting measures worth EUR10bn, which could bring France’s 2019 deficit up to 3.4% and thereby be in breach of the EU’s 3% limit. Commissioner Moscovici hinted that due to the general anti-austerity mood, the EC has chosen dialogue instead of rule rigidity, but there is no doubt that Macron’s policy shift has weakened the Commission’s hand in the Italian budget fight," adds Mihr.

The yield offered on Italian government debt has fallen on news of a breakthrough, and the Euro has risen ensuring the Pound-to-Euro exchange rate is currently quoted at 1.1071, levels last seen a week prior, and Karen Jones, a technical analyst at Commerzbank tells us the move might extend back to 1.10, and even 1.09.

The analyst believes the Euro will continue to hold the advantage as long as the GBP/EUR exchange rate remains below the 1.1185 October low.

One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment.

This is particularly useful in the current Brexit climate where headlines regularly roll off the newswires making it difficult to play the Pound on a fundamental basis.

With this in mind, Jones argues the recent move lower in the GBP/EUR exchange rate "does looks directional" and she would expect to see the market challenge the 1.10 August low.

We reported earlier this week that the 1.10 level represents a significant level of support for the exchange rate, and it is therefore likely to struggle to go below here.

However, a break of 1.10 support has Jones targeting the bottom of the 2016-2018 channel at 1.09.

Commerzbank technicians are targeting the 1.10 August bottom in the short-term (1-3 weeks). In the long-term (1-3 months) targets are the 1.10 August bottom then the bottom of the 2016-2018 channel at 1.09.

Advertisement
Bank-beating GBP/EUR exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here