Pound-Euro Exchange Rate Uptrend Intact, Break of 1.11 Possible

- GBP softer after EU leaders say no to intensification of trade negotiations
- BUt GBP/EUR short-term technical uptrend intact
- 1.11 looks to be acting as a magnet
- "top of the range just above 1.1240" possible says Saxo's Hardy

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The British Pound maintains a technical uptrend against the Euro that is supportive of a view that further gains can be eked out in the near-term, particularly if the fundamental backdrop concerning Brexit trade negotiations remains cautiously constructive.

The Pound-to-Euro exchange rate has been edging higher since September 11 when it plumbed a low of 1.0762, with gains reaching a new multi-week high at 1.11 on Wednesday October 14.

"Potential for further gains here, but still need the key breakthrough," says John J Hardy, Head of FX Strategy at Saxo Bank.

The Pound fell back from reaching 1.11 in the Thursday session, a decline consistent with the tops-turvy nature of intraday Sterling action owing to the often contradictory nature of Brexit-related headlines. Sharp knee-jerk reactions by currency market participants to Brexit news headlines have been a feature since the 2016 EU referendum, but they do tend to become more frequent and intense whenever a major deadline approaches.

Despite volatility, the daily GBP/EUR chart confirms the existence of a clearly-defined uptrend channel:

Above: GBP/EUR trending higher in the short-term, looks intent on longer-term equilibrium rate of 1.11

1.11 is seen as something of a longer-term pivot for GBP/EUR (it coincides with the round number of 0.90 in EUR/GBP, which might help explain some of its allure with technical traders and analysts). The Pound's sharp drop in March when covid-19 panic gripped markets saw GBP/EUR fall sharply to below 1.06 but then ultimately correct strongly higher before mean-reverting back towards 1.11.

GBP/EUR fell sharply in early September and went below 1.08 as Brexit anxieties rose, but price action since then looks to be consistent with another mean-reversion back to 1.11.

However a more sustained directional move in the exchange rate is unlikely to be forthcoming until a clearer outcome to Brexit trade negotiations is realised.

"On balance, the fact that talks are ongoing are promising for Sterling, but we still likely will need that critical breakthrough for Sterling to post any larger directional move," says Hardy.

Hardy says a break above 1.11 in the Pound-to-Euro exchange rate would represent a fuller reversal of the prior decline and could lead to the exploration of the top of the range just above 1.1240, "which also happens to coincide with the 200-day moving average".

The Pound softened on Thursday and into Friday after EU leaders disappointed UK negotiators by offering no desire to enter into a final period of intense negotiations and instead told the UK to make the concessions necessary to strike a deal. EU leaders said in a statement following the European Council's discussion on Brexit negotiations, "the European Council invites the Union's chief negotiator to continue negotiations in the coming weeks."

The statement also called "on the UK to make the necessary moves to make an agreement possible."

"Surprised by suggestion that to get an agreement all future moves must come from UK. It's an unusual approach to conducting a negotiation," said UK Chief Negotiator David Frost in response. "Disappointed by the European Council conclusions on UK/EU negotiations. Surprised EU is no longer committed to working "intensively" to reach a future partnership as agreed with Ursula von der Leyen," said UK Chief Negotiator David Frost, following the release of a statement concerning the Brexit trade negotiations by EU leaders."

The next development in the Brexit saga will likely come on Friday as Prime Minister Boris Johnson announces the UK's next move in response to these developments.

Political commentators and analysts are saying talks are now likely to extend into November, with a mid-November deadline looking likely given both EU and UK parliaments will need a deal to ratify before year-end around about this point.

Therefore, expect some of the recent pressures that had built in the run up to the October EU summit to dissipate over coming days, a development that could prove supportive of the technical uptrend underpinning GBP/EUR.

Mark McCormick, Global Head of FX Strategy at TD Securities says a "low r-squared in GBP means that we can trade EUR/GBP as a Brexit proxy in the weeks ahead.

"Brexit tensions continue to simmer, keeping markets on edge, but we think a landing zone will be found eventually," says McCormick.

TD Securities tell clients they remain focused on the upside potential in Sterling against the Euro, for now.