Why the Pound-Euro Exchange Rate has Dipped this Week

Image © Adobe Images

• GBP/EUR spot rate at time of publication: 1.1212
• Bank transfer rate (indicative guide): 1.0920-1.1000
• FX specialist providers (indicative guide): 1.1060-1.1111
• More information on FX specialist rates here

Technical forces might well account for the decline in Pound Sterling against the Euro over recent days after the exchange rate hit a high at 1.1276 on Monday.

While Brexit trade negotiations remain the major fundamental driver of Pound exchange rates, a distinct absence of tradable Brexit news over the course of the past five days have left the market vulnerable to technical forces.

The Pound-to-Euro exchange rate has been in an uptrend since September as the EU and UK struck a decidedly more constructive tone in negotiations, leading markets to ramp up expectations for a trade deal to be struck by year-end.

This has resulted in a multi-day rally that keeps the technical setup broadly positive.

However, technical resistance in the 1.1280/1.1281 area is a notable feature of the GBP/EUR exchange rate's market setup in 2020: the pair has failed to rally above here on a number of occasions since June.

One of those occasions appears to have been just this week when it topped out at 1.12781, on Monday:

Above: GBP/EUR daily chart. Lock in current exchange rates for use at a point in coming months, thereby protecting your payments budget, learn more here.

According to one technical analyst, a break above 1.1280/1.1281 is required for more sustained gains in Sterling to be realised.

According to technical analyst David Sneddon at Credit Suisse, an eventual move above key resistance at 1.1280/1.1281 should confirm an important bottom has been recorded and that a more sustained uptrend has begun.

Sneddon says the GBP/EUR exchange rate remains supported above its rising 21-day exponential moving average at 1.1155, as shown by the blue line on the chart above.

Credit Suisse's "direct bias" is for further upside with the pressure firmly on the key price pivot at 1.1280/1.1281.

A pivot point on a chart is an area where price action in an exchange rate can flip, therefore a failure to break above this areas identified by Sneddon could result in the Pound falling back. However, a break above this area could send the exchange rate into a more sustained uptrend.

Indeed, "a clear and closing break" above here would see an important bottom complete, says Sneddon, that would potentially turn the core trend bullish.

But as the chart shows, the decline in the exchange rate this week could be a consequence of a failure around this pivot.

Sneddon says near-term support for the GBP/EUR exchange rate now lies at 1.1189, a level that could arrest declines.

{wbamp-hide start}

Should some significant news regarding Brexit come through over the weekend then Monday could see a more lively Sterling exchange rate complex.

EU Chief Negotiator Michel Barnier was supposed to arrive in London ahead of the weekend to reconvene face to face negotiations. However, it remains unclear as to whether he will arrive at all, owing to an apparent stalemate in negotiations.

"After a solid rally for the currency, sterling traders would be ill-prepared for the sudden (and likely very low odds) risk that a proper stand-off develops pointing to a real No-deal Brexit scenario," says John J Hardy, Head of FX Strategy at Saxo Bank.

The potential for a rude negative surprise to markets is something we touched on, here.

"All our short-term (1-3 month) dashboard tools argue to sell GBP," says Mark McCormick, Global Head of FX Strategy at TD Securities in a recent note to clients. "We think part of the Brexit process itself has been priced out. Brexit pricing, to the contrary, might be too upbeat now."

Wednesday saw France's foreign minister Jean-Yves Le Drian tell French politicians that the UK had still not yielded on the matter of fisheries.

France has indicated in the past that it wants to enjoy unchanged access to UK fishing waters, while recent reports have said that they do accept they will see their quotas decline to a degree.

But the French minister said "British overtures remain insufficient on the most sensitive matters."

"In just over a month, the UK will leave the EU’s single market and customs union, yet trade talks are still ongoing and frustration from both sides is beginning to mount. Sterling, a barometer of Brexit, remains suspended above $1.33 versus the USD and €1.12 versus the Euro – about 3% and 1% stronger respectively month-to-date," says George Vessey, Currency Strategist at Western Union.

A high-level intervention between EU leaders and Prime Minister Boris Johnson is likely required to trigger a breakthrough, until then the negotiating teams will find they have little room for manoeuvre.

A call between Johnson and EU Commission President Ursula von der Leyen is allegedly supposed to take point at some point, but no confirmation has yet been forthcoming.

"European Commission president Ursula von der Leyen has warned that it is still impossible to say whether a deal will be agreed in time. UK PM Boris Johnson confirmed the transition period will not be extended. Hence, we find ourselves at an all too familiar Brexit inflection point as time grows short for an agreement to be ratified before year-end. There remains an air of optimism though and sterling looks poised to break higher from a technical perspective. However, there are warning signals in FX futures markets suggesting traders are bracing for greater GBP downside risk compared to GBP upside risk," says Vessey.

"One irony of a no-deal scenario unfolding is that UK-EU trade talks will likely rumble on at some point in 2021, after a cooling off period, in an attempt to form some sort of future relationship," he adds.