GBP/EUR Forecast: GBP/EUR Exchange Rate Must Close Above 1.26 for Falls to End

We are now seeing the pair at a key technical level - should it be resolved then the forecast in the near- to medium-term turns bullish once more.

Why the 1.2600 Rate of Exchange is So Important For the Forecast

When predicting the future trajectory of an exchange rate, or any financial security for that matter, there are some key levels at which moves end, consolidate and ultimately resolve.

1.26 GBP to EUR is once such level.

According to Bill McNamara at Charles Stanley a recent downturn in the exchange rate could be about to end, provided this level is resolved:

"Sterling recovered its poise somewhat last week (following three straight weeks of losses) as traders reacted to the prospect of further stimulus in the eurozone.

"It is possible that we have seen the downside in the UK currency for now although we would need to see a close above 1.26 to confirm this prognosis."

(PS: These are spot market quotes to which a discretionary spread is added by your bank/provider. An independent FX provider will however guarantee to undercut your bank's offer, in some cases delivering up to 5% more FX. Please learn more.)

Shorter-Term Forecast: Beware a Correction Lower

The renewed sense of urgency in the sterling euro rate is currently resulting in overbought conditions in the near-term timeframes.

Overbought conditions do of course imply that a correction lower could shape up.

Furthermore, the reasons for selling the shared currency, from a fundamental perspective, are also bought into question by some market watchers.

Manuel Oliveri, FX Strategist at Crédit Agricole suggests upside risks to the euro exchange rate complex could shape-up:

"The EUR has been under pressure, mainly on the back of rising expectations of the ECB being closer in considering additional policy measures. This is due to central bank President Draghi indicating that falling long-term inflation expectations could require additional policy easing.

"However, it appears too early to expect the central bank considering further easing anytime soon. In that respect it must be noted that additional time may be needed for evaluating the latest measures impact on growth and inflation.

"Looking ahead, investors’ focus will shift to this week’s inflation data releases from Germany and the Eurozone as a whole.

"Against consensus we see room of stabilising price developments. This suggests the EUR should be subject to upside risk. From a broader angle, however, we expect the single currency to remain a sell on rallies."

Euro at Fresh Lows vs Dollar

The euro hit a fresh 1-year low against the US dollar mid-week.

"While there are various sentiment figures expected to be released this morning throughout the euro zone, the results will not be grand enough to pull attention away from the bigger picture. According to minutes released yesterday, three US policy makers asked for a rise in the discount rate to 1.0 percent ahead of the July FOMC meeting," says Tiffany Bank at Western Union.

The discount rate is what the US central bank asks for in return for emergency lending to banks.

Bank goes on to say:

"That differs from the Fed Funds rate which governs the cost of lending between banks. At any rate the tone of the minutes reflect a more optimistic view on US policy. verses what the head of the European Central Bank had to say about his policy outlook last Friday.

"European importers could be in for a rough ride and even a slippery slide lower, if US GDP figures are not revised substantially lower, as expected, tomorrow."