Pound Euro Predictions: WIll the GBP to EUR Exchange Rate Resume its Rally?

The sterling euro rate has enjoyed a strong rally through much of 2014 owing to the underlying improvement in the UK's economic outlook - compare it to the Eurozone's underperformance and we can understand why the pair has headed higher.

Momentum for the GBP/EUR does however appear to have run its course in late summer. The recent falls in sterling may be temporary if we take the view that nothing ever moves in a straight line.

We also know that the euro is a stubborn customer that can often show strength just when we would be expecting otherwise.

For reference, at the time of writing the pound to euro is unchanged on the previous day's close at 1.2522.     

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What Do the Charts Tell Us?

Financial markets are incredibly complex and second-guessing them often leads to frustration and missed chances.

That is why looking at the price charts offers a more sober and tactical approach to the currency markets.

Recently there has been a negative shift in perception towards sterling which has resulted in three consecutive weekly losses against the single currency.

According to analyst Bill McNamara at Charles Stanley, "the charts are however suggesting that it is still working off the ‘overboughtness’ that had formed over the course of its previous advance and, in fact, there is probably still room for further near-term weakness before the buyers are tempted back."

The important point to note is that the longer-term trend is still up, and if the current dip runs further we could see a renewed interest from the buyers which could see the rate head towards 1.29 by year-end.

Interest rate confusion helps the pound rebound

The current dip in the sterling to euro exchange rate has a lot to do with perceptions regarding UK interest rates - and importantly when the Bank of England plans to raise them.

Minutes from the Bank of England’s August meeting showed that not one but two of the nine officials voted to boost borrowing rates to 0.75 percent from an all-time low of 0.50 percent, reasoning an improving economy and a rapidly falling jobless rate.

At the margin, the minutes showed the door still ajar to a late 2014 rate hike.

But since the last BOE meeting, wage growth has contracted, inflation has slowed and a central bank survey sounded dovish – all of which argue for a later rate rise. Rate hike uncertainty and confusion is likely to keep downward pressure on the pound.

Retail sales disappoint

Could the pound euro exchange rate be on course for its fourth consecutive week of losses?

"The Pound is lurching towards the holiday weekend having taken a small step forward and two big strides back," says Tony Wilson, head of strategy at the foreign exchange specialists FEXCO.

Today saw the release of surprisingly weak retail sales, sales came in at 0.1% versus 0.4% eyed as the reading missed its estimate for the third month in a row.

"As several analysts have pointed out with both UK inflation and retail sales both lower than forecast for the past three months, the data makes a mockery of yesterday's hawkish MPC minutes which saw two members vote for a rate hike," says Boris Schlossberg at BK Asset Management.

Indeed, Wilson reckons the chance of an interest rate hike will recede:

"The two dissenting voices on the Bank's rate-setting committee are likely to remain drowned out for many months yet, as the continued weakness of consumer demand, plus the lack of inflationary pressure, will combine to ensure that monetary policy remains firmly in "steady as she goes" territory.

"With real wages being squeezed and July's retail sales falling far short of expectations, consumers are clearly concerned about the impact of a rate hike. As a result it's increasingly likely that the MPC's doves will heed those concerns and hold off on a rate rise until well into 2015.

"Wednesday's Sterling rally is fast becoming a distant memory as the Pound slumps back towards the levels recorded on Tuesday - when it dipped to its lowest rate against the Dollar since April."