Alert: Pound euro exchange rate crashes through 1.2, outlook deteriorates as 1.19 seen next
- Written by: Gary Howes
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The British pound has seen heightened pressures against the euro on Thursday with the near term outlook turning increasingly bearish.
The British pound to euro exchange rate is half a percent lower in mid-afternoon trade in London.
The GBP/EUR exchange rate has broken through support at 1.2 and is now heading towards the 1.19 level.
Momentum is now decidedly firmly against the pound and the outlook now favours the euro in the short-term, at least.
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Why is the euro stronger today?
The euro is in the driving seat on the global FX markets.
The euro was sent higher and equities lower as ECB President Mario Draghi told markets he saw no deflation risks to the Eurozone.
Market hopes for more a more proactive approach to aiding the Eurozone economy have been dashed. Are we witnessing a sea-change in sentiment towards the euro?
Draghi said the ECB sees a protracted period of low inflation, not full blown deflation, reiterating that the bank is “monitoring developments closely".
The recent slowdown in inflation is partly due to lower energy costs, he said, adding that the recovery in the euro area is, "still fragile and still uneven".
However, this dovish remark was flat-out ignored. Markets have got the hint that low inflation is not going to budge markets, and if this won't then what will?
We read it as a signal that no new stimulatory policy will be released by the ECB, thus this is seen as a boost to the outlook for the euro.
Earlier, the euro fell to session lows against the dollar on Thursday after the European Central Bank left rates on hold at record lows, as investors awaited comments by President Mario Draghi at the bank’s post-policy meeting press conference.
Leading into the ECB decision the euro was seen trading relatively flat against the dollar with investors unwilling to expose themselves to any surprises.
Now that the decision is out of the way we are seeing selling pressure increase bringing to an end what was seen as a consolidate phase.
Analyst Craig Erlam at Alpari UK says he is bearish on the euro dollar exchange rate for a couple of reasons:
"The first is technical, with the pair having broken below the ascending trend line, following a relatively sharp sell-off, before testing this as a new level of resistance yesterday. This effectively acted as confirmation of the break.
"The consolidation that followed is typically a bearish continuation pattern. What this all tells us is that, while the pair is currently consolidating ahead of the ECB decision, there is a clear bearish bias in the market."
"This reflects expectations that the ECB will ease monetary policy or at the very least release a very dovish statement. This is the second reason why I am bearish. It’s very unlikely that the ECB will do nothing and show no desire to change their stance in the coming months, which means the likely impact on the euro will be bearish.
"If we do see a break below the flag formation, the initial target will be Monday’s lows of 1.3476, followed by 1.3458, the 38.2 fib level, 1.3378, the 200-day SMA, and 1.3324, the 50 fib level."
Analysts at UBS have also confirmed the outlook for the euro is bearish: "As bearish conditions are in place, any recovery should be limited to resistance at 1.3577. Support is at 1.3458, a break below which would extend the weakness to 1.3400 and then 1.3296."
