Euro Pound Exchange Rate Forecast: Heavy Trade in Long-Term, Support in Short-Term

By Gary Howes

The euro pound exchange rate forecast suggests further heavy trade lies ahead, particularly if the intermediate-term horizon is considered.

The euro to pound exchange rate (EUR/GBP) is seen to be holding ground in the 1.2150's in the 24 hours following the release of Wednesday's labour market data.

Analyst Piet Lammens at KBC Markets says he maintains a Long-Term sterling positive bias, but in the day-to-day perspective, the sterling correction might have some further to go. "We remain also a bit cautious on sterling ahead of tomorrow’s retail sales as we think that a rather poor figure is possible."

The decline in the EUR/GBP comes despite today's UK unemployment numbers which are currently being seen as GBP-negative.

While the fundamental picture continues to favour the pound sterling over the euro in 2014, as shown by all the major investment banks, the sailing will of course never be smooth as confirmed by price action this week.

Even though we have witnessed the euro/pound recover some lost ground this week it must be noted that the technical forecast still favours the GBP.

By selecting a short-term horizon frame - defined as being between 2 to 6 weeks - we note that no less than 7 bearish technical events are in play.

There are 3 bullish events to consider, however on balance we would assume further downside based on the weighting of currently relevant technical indicators. (7 bears, 3 bulls),

Be aware though that the we are currently witnessing some conflicting suggestions as to the immediate-term forecast for the euro pound.

Yesterday bearish momentum was confirmed by the formation of a Triple Moving Average Crossover (4-day 9-day 18-day) when the price closed at 0.8246. This confirms the price is generally in an established trend (bullish or bearish) for the time horizon represented by the moving average periods.  

However, we also saw the formation of a bullish Williams % R on the 18th, which would suggest that we are in a new uptrend now that the price has recovered from oversold (dropped below -80 then rose above).

The intermediate-term forecast for the euro pound exchange rate is undoubtedly negative.

Support is found at 0.8232 while resistance is found at 0.8357.

Analysts at Recognia Inc suggest that those with an eye on the exchange rate should consider a stop-loss at the 0.8082 level when betting on an increase in the EUR/GBP value, and a stop-loss at 0.8355 when betting on declines.

Market action today

Looking at the state of markets on Wednesday, European equity markets remain on the defensive and Emerging Market FX is under pressure.  

The risk off mood is not really reflected in G-10 currency moves where the USD is broadly mixed, while the NZD and the CAD are among the top performers on the session.   

However, the CAD and commodities generally are worth watching to see if there is any reaction to a WSJ report that China is sovereign wealth fund is shifting away from commodity holdings to US and European investments.   

Australia’s leading index rose 0.8% in December (0.2% in November).  UK Unemployment rose unexpectedly to 7.2% in December.  Wages rose 1.1% in the year.

In the US, PPI data for January is released, alongside January housing starts and permits (8.30ET).  The FOMC minutes for the January 28-29 meeting are published at 14.00ET.  

In Canada, December wholesale trade numbers are released at 8.30ET.  

We look for a below consensus drop of 1.0% in the month (market 0.4%).  Fed speakers Lockhart (12.15ET), Bullard (13.00ET) and Williams (19.00ET) are all non-voters (see Williams comment below).