GBP/EUR: Exchange Rate Recovery Forecast to Run Higher

The euro exchange rate complex has advanced in mid-month trading with decent gains being registered against the British pound (GBP).

However, as we head into the weekend the GBP appears to have halted the declines and is in the process of consolidating. Indeed, we forecast that this consolidation could be the base from which further gains could be realised.

Worries about the health of the Eurozone economy are coming to a head with interest rates in countries like Greece rocketing back to Eurozone crisis levels as investors demand a higher premium for investing in these risky assets.

Currency markets couldn't ignore the moves forever and a set of major sell orders were executed mid-morning Thursday sending the euro into a nose-dive.

• At the time of writing we see the pound to euro exchange rate is trading 0.41 pct higher; the conversion is @ 1.2615.
• The euro to pound sterling exchange rate conversion is at 0.7927.

Note: The above quotes are taken from the wholesale markets, your bank will affix a spread to the rate at their own discretion. By actively seeking out a better rate with an independent FX provider you could get closer to the market and save up to 5% more FX in the process. Please find out how.

Euro Sent Lower

Bearish sentiment caught up with the euro as it gave back some of this week's gains vs the pound.

"The euro dodged a bullet Thursday as euro zone inflation held at 0.3 percent for September. A weaker reading would have heightened deflation fears and renewed pressure on the euro. Risks for the euro remain to the downside, particularly with markets starting to feel queasy again about the bloc’s debt crisis," says Manimbo.

Worries about the fiscal health of Greece have risen, taking a toll on debt markets in Spain and Italy.

But, Why Has the Euro Been Stronger in October?

There are a host of reasons for the slump in the GBP to EUR rate.

The biggest fall came on Tuesday with the release of lower-than-expected UK inflation data.

Falling inflation suggests that the Bank of England will push back their first interest rate hike until mid year 2015; the GBP must move lower in sympathy.

On Wednesday, EUR demand comes as traders move out of GBP and USD on poor US economic data and into the now heavily discounted EUR.

Indeed, the longer-term slump in the euro had to come to an end at some point.

Longer-term, the Eurozone is in far worse shape than the economies of the UK and US - we see further action being announced at the European Central Bank (ECB) and this will undermined confidence in the EUR.

"Falling inflation expectations add to the growing list of data that argue for further monetary support from the ECB. Consequently, any upside the euro enjoys against the dollar should remain limited," says Esiner.

Pound, Euro Forecasts: Where Next?

Giving a positive forecast for the euro pound exchange rate (EUR/GBP) are ICN Financial:

"Positive expectations above 0.7890, risk-limit below 0.7815.

"The pair remained stable above 0.7890, so the bullish intraday scenario is still valid waiting to test the resistance of the descending channel at 0.8055 mainly.

"Stability of this resistance pushes the pair to extend the overall downside move again, while breaching it brings more positivity on the short-term targeting next 0.8145."

Longer-Term Downtrend in Place

Swissquote Research's Luc Luyet confirms the near-term could see the GBP move lower, however the longer-term picture ultimately favours sterling:

"EUR/GBP continues to rise after the break of its key resistance at 0.7889 (23/09/2014 high). The resistance at 0.7952 (intraday high) has been breached. Another resistance lies at 0.8010 (16/09/2014 high). Hourly supports now stand at 0.7906 (14/10/2014 low) and 0.7850 (10/10/2014 low).

"In the longer term, the underlying downtrend favours a test of the major support area between 0.7755 (23/07/2012 low) and 0.7694 (20/10/2008 low) at minimum. A decisive break of the resistance at 0.8034 (25/06/2014 high) is needed to suggest some exhaustion in the medium-term selling pressures."

Market Panic Sets In - What Next?

These are interesting times on global markets with volatility making a return in firm fashion.

As recounted by Piet Lammens at KBC Markets:

"Today’s trading had something surreal. We’ll start with the daily changes. Hold on tight. The German yield curve bull flattened. The 2‐yr yield lost 1.6 bps, the 5‐yr yield shed 5.4 bps (< 0.10%), the 10‐yr yield dipped by 11 bps (<0.75%) and the 30‐yr yield fell by 14.8 bps.

"Yields from the 4‐yr sector until the very long end recorded new all‐time lows.

"In the US, the damage was even bigger. The 2‐yr, 5‐yr, 10‐yr and 30‐yr yields respectively fell by 11.6, 29.5 (!), 29.5 (!) and 25 bps.

"The US 30‐yr yield completely retraced last year’s up‐leg on the back of the tapering tantrum. The US 10‐yr yield dropped below the 2%‐mark.

"What happened today and in past days cannot be simply explained by a couple of bad US eco data. It seems that markets are embracing a very bearish view in which growth is missing and inflation remains downwardly oriented.

"Is the market losing its confidence in monetary/fiscal policymakers?

"Of course, there might have been maybe at some point a technical reason for the instantaneous drop of the e.g. 5‐year yield by 15 basis points. We’ll maybe hear about it in the next hours.

"For the first time in a long while, PIIGS spreads versus Germany suffered from risk‐off sentiment and widened significantly: Italy (+11 bps), Spain (+15 bps), Italy (+21 bps), Portugal (+24 bps) and Greece (+108 bps).

"Intraday, the slide of European equities started at the onset of trading amid an empty EMU eco calendar. It protected the intraday downside of bonds and the Bund gradually rose to new highs. The move accelerated during US dealings.

"SF Williams warning that the Fed could engage in more QE if the economy falters echoed through the market. Disappointing eco data (retail sales, empire manufacturing, PPI) and a second Ebola case in the US drove bonds to gigantic gains and yields significantly lower (see above). European and US equities lose more than 3% and EUR/USD gained two big figures to 1.2850."