Pound Euro Exchange Rate Recovers, But Can GBP/EUR Avoid Further IndyRef Fears?

The buying interest could well be related to a number of bargain hunters stepping into the market to pick up GBP on the cheap ahead of a potential recovery in the event of a No vote. Is this the beginning of a longer-term recovery? We doubt it and await the passing of the referendum.

Our last quote on the currency sees the British pound to euro exchange rate (GBP/EUR) trading unchanged pct higher on a day-to-day basis having reached 1.2552.

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Bargain Hunters Take Advantage of a Week Currency

This week saw sterling at a ten-month lows against the US Dollar and three-month lows against the euro.

This has prompted some buying action as those looking to stock up on GBP are being offered attractive levels at which to transact.  

However, those waiting on a full-scale recovery should be aware that, "the Scottish Independence referendum is still taking the spotlight, with Sterling in no shape to recover the losses it suffered over the past week," says Charles Purdy at Smart Currency Business.

YouGov and various other polls show the ‘Yes’ campaign to currently be in the lead but only by a small margin.

The UK Government has since had to act on the back of these polls, a contrast to their laid back approach when the ‘No’ campaign was comfortably in the lead.

"We did, however, see small resistance against sterling weakness yesterday afternoon, on the back of Bank of England (BoE) Governor Mark Carney’s words that the BoE may increase the benchmark interest rate from a record low in Spring 2015. This should be the point at which inflation has reached the BoE’s 2% target and 1.2 million jobs created," says Purdy.

Euro Finds Breathing Space

The euro has found some breathing space against the greenback as it has so far gone today’s session without slumping to new 14-month lows.

"Underlying sentiment remains poor, however, as much divergence remains between the U.S. and Europe in terms of overall economic strength and expectations for future monetary policy. The European Central Bank (ECB) seems in the early innings of loosening policy while the Fed appears in the late innings," warns Joe Manimbo at Western Union.

Outlook for the Euro Dollar: Sell Any Bounces

Turning to the EUR/USD, we see the outlook remains negative. Credit Agricole are seen to be telling their clients not to be fooled by any bounces:

"Below 1.2859 should look to our core target zone of 1.2787/55 – the 61.8% retracement of the entire 2012/14 bull trend and July 2013 low. We look for this to then ideally hold at first, for a retracement to the dramatic sell-off of the past three months," CS projects.

"Bigger picture though, we will view any strength as corrective, and look for an eventual decline towards 1.2200, potentially even the 1.2042 low of 2012. Near-term resistance moves to 1.2959/63, but with a break above 1.2989 needed to confirm a correction higher is underway for 1.3070."