Longer Term Euro Sterling Exchange Rate (EUR/GBP) Outlook Favours the GBP, Eurozone Situation Remains Dire
- Written by: Gary Howes
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The euro to pound sterling has edged higher a day after we saw the rate undergo a significant collapse. The outlook is said to favour the British pound over its continental cousin.
We are seeing a pullback in the British pound (GBP) on Thursday morning; the move is understandable considering the hefty spike in the pound exchange rate complex witnessed yesterday. "EUR/GBP is off the correction low in the 0.8180 area and tries to regain the 0.82 barrier at the moment of writing. This move is in the first place due to euro strength rather than sterling weakness," says Piet Lammens at KBC Markets.
The euro to pound sterling exchange rate (EUR/GBP) is trading 0.24 pct higher than seen at last night's close. The rate is quoted at 0.8210 while the pound to euro exchange rate is trading at 1.2180.
Note: All EUR quotes here refer to the wholesale spot market. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.
We find this update issued by Olympia Trust Company to be pertinent: "Though it has successfully dodged headlines lately, the situation in Europe remains dire. An EU document has surfaced indicating that the European commission is looking for advice on drafting a law “to mobilize more personal pension savings for long-term financing”, read: every European citizen may face a sizeable haircut on their savings to help boost the economy and plug the funding gap the region faces in the wake of the financial crisis. The ongoing derailment in Europe can easily spur risk aversion in markets, weighing on equities and boosting the USD."
Why is the British pound outperforming the euro today?
The euro to pound sterling exchange rate took a tumble as the BOE amended its forward guidance on Wednesday.
The sterling exchange rate complex jumped higher after the BoE indicated that it wants to use the policy tools at its disposal to help remove the slack in the economy.
In case of rate hikes, the pace will be very gradual.
"Even so, the market concluded that a rate hike in the first half of 2015 is still well possible, supporting the UK currency," says Piet Lammens at KBC Markets.
Short-term outlook for the euro sterling rate
This morning, the RICS House price balance unexpectedly declined from 56% to 53%. A rise to 58% was expected.
The headline pound dollar exchange rate is holding north of 1.66 on broad-based USD weakness.
According to Lammens sterling traders might look for a new equilibrium after yesterday’s repositioning in the wake of the inflation report and the amended BoE forward guidance.
A temporary correction after yesterday’s sterling gains is likely.
The price action in cable is interesting as the correction top (1.6668) is coming within reach.
The overall performance of the dollar will play an important role whether this barrier might be conquered. Even so, in a short-term perspective this high profile resistance might inspire some (broad-based) profit taking on sterling longs.
Concerning the near-term outlook for the euro sterling, Lammens says:
"Looking at EUR/GBP, the 0.8168/60 (correction low/62% retracement) support is key. After yesterday’s decline, a technical rebound is possible.
"However, we continue to see more pronounced upticks in this pair as a selling opportunity. In this respect, the performance of the euro will of course also be important."
Yesterday’s decline of EUR/GBP was also partially due to ECB speak on the possibility of a negative deposit rate. In a day-today perspective, the euro is holding fairly strong.
However, the euro might come under more pressure if the debate on additional ECB easing next month would intensify.
The long term outlook for the euro pound exchange rate favours the Sterling
KBC Markets advise that they have a sterling positive bias longer term as the BoE will probably tighten policy sooner than the ECB.
Lammens says:
"EUR/GBP is captured in a gradual downtrend channel since mid-2013.
"Recently, we favored short-term consolidation as some good news is already discounted and as some UK eco data were slightly less buoyant.
"Last week, the EUR/GBP cross rate tested the 0.8350 resistance as the ECB was less soft than expected. For now, the resistance held and after yesterday’s setback, this barrier looks safe for now. On the downside, the 0.8168/60 support is key. A break below this level would be a negative for the euro and a further positive for sterling. We maintain our sell-on-upticks approach."
