Pound Sterling vs. Euro: Fresh July Best for those Buying Foreign Exchange

Above: New Prime Minister Boris Johnson arrives at Downing Street from Buckingham Palace. Image (C) Pound Sterling Live, still courtesy of BBC.

The Pound-to-Euro exchange rate has triggered a fresh July high over the course of the past 24 hours, with Sterling looking to have temporarily completed a multi-week decline.

Losses in the UK currency ended last week, and a short-term recovery back above 1.12 has since taken shape.

A particularly strong day of gains witnessed on Wednesday took Sterling to its best rate of exchange for those buying Euros since June 21, and on the current trajectory the GBP/EUR exchange rate will have finally snapped a 11-week losing streak if it closes around current levels on Friday.

"The Sterling rebound that started yesterday, continued today. The move was mainly technical in nature," says Mathias Van der Jeugt, an analyst with KBC Markets. "Sterling shorts apparently took some further profit and adapted positioning as the event of the nomination of the new UK PM was out of the way."

The foreign exchange market has been so heavily invested in selling Sterling against the Euro that the trade had become crowded. The technical profit-taking referred to by Van der Jeugt occurs when traders exit a crowded trade and book profit, thereby assisting the under-pressure currency higher.

Of course, if this view is correct and Sterling's rally is merely technical in nature, it stands that the selling pressures could recommence at any time.

Therefore, those looking to transact out of Sterling should be wary of such an outcome and not become too greedy in expecting a long-lasting recovery.

Above: Sterling-Euro levels and trends in July 2019

"The Pound, which refused to fall on the announcement of Boris Johnson becoming the new UK Prime Minister, was higher across the board at the time of writing. Clearly, short-side profit taking was supporting the beleaguered currency after sharp falls in the previous months," says Fawad Razaqzada, a Technical Analyst at Forex.com.

From a technical point of view, Razaqzada continues to favour looking for bullish setups on the GBP/EUR exchange rate after it posted a potential bullish reversal candle last week.

The market has now seen a breakthrough of resistance around 1.1293/1.13, an area which could turn into support upon a retest later today or this week.

Our suspicion is that the Pound-to-Euro exchange rate and other Sterling-based pairs might enter a sideways-moving trend until such a time as more concrete policies on Brexit by the incoming Johnson government are made known, and with parliament about to go on their summer break there could be a quiet few weeks ahead.

"Markets are now awaiting on who will occupy the key positions in the new government. At least for now, the UK PM didn’t give any concrete hints on how he intends to solve Brexit," says Van der Jeugt.

We are however acutely aware that Johnson will have a working majority in parliament of just one by the time the results of today's Brecon and Radnorshire by-election is done, which is expected to be won by the Liberal Democrats.

It is almost certain that Johnson will have little choice to call a new General Election at some point as a result: what kind of stable and ambitous government can operate on the basis of a one-person majority?

Of course, Johnson could be forced to call an election were parliament to carry a vote of no-confidence in the government.

Labour Party leader Jeremy Corbyn maintains that he will call a no-confidence vote as soon as he feels he has the numbers.

So it's not just Brexit that will create the uncertainty that will keep Sterling under pressure, a potential General Election is a very big possibility.

"GBP traders will have their eyes trained on the first few days - or possibly even hours - in office of Johnson as Prime Minister, as resistance in the House of Commons - including his own Tory party - is immense," says Esther Reichelt, FX Analyst with Commerzbank. "That makes a Johnson government contestable, as the Tories do not enjoy a majority in the House of Commons."

Johnson could even face a vote of no-confidence as early as today, the final day before the summer recess.

"If he were to lose that we would be facing a completely political novelty - the uncertainty surrounding that is also likely to be putting pressure on Sterling exchange rates," says Reichelt.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement