Pound Sterling Stricken by Steamrolling Euro but Could Hold 1.1740

• GBP/EUR clutching for support at new 2022 low
• Steamrolling EUR adds further pressure on GBP 
• After BoE stokes doubt over Bank Rate outlook 
• Sees GBP/EUR testing support near to 1.1740 

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The Pound to Euro exchange rate has been left stricken by a steamrolling rally from the European single currency but could be likely to stabilise above an important level of technical support that was tested for the first time in the penultimate session of the week.

Pound Sterling had already been on the back foot but tumbled further against the single currency ahead of the Thursday session after the Euro notched up a hat-trick of gains over the Dollar and other currencies amid a cacophony of supportive developments. 

This saw GBP/EUR fall beneath its 200-day moving-average at 1.1803 during the midweek session before testing the 61.8% Fibonacci retracement of its April 2021 uptrend around 1.1742 early on Thursday, which is a major level of technical support for Sterling.

"We doubt, however, there is enough fundamental justification for EUR/GBP to trade consistently above 0.85  [GBP/EUR 1.1764]," says Franceso Pesole, a strategist at ING.

"The BoE-ECB policy divergence remains wide, and the Ukraine war looks likely to have hit the eurozone harder than the UK. In our view, a gradual return to the 0.83-0.84 [GBP/EUR: 1.1904 to 1.2048] region looks more likely into the summer," Pesole and colleagues said on Wednesday.

Above: Pound to Euro exchange rate shown at daily intervals with Fibonacci retracements of April 2021 uptrend indicating various areas of technical support for Sterling, and shown alongside selected moving-averages. Click image for closer inspection.

Sterling was bogged down early on this week after Bank of England Governor Andrew Bailey clarified in no uncertain terms what was alluded to in the BoE’s March policy statement when saying this Monday that the present commodity-induced squeeze on incomes could eventually serve as a substitute for some of the additional increases in Bank Rate that markets have taken as given for later in 2022.

“The BoE though is pushing a counter-narrative that falling real disposable incomes will create an offsetting demand shock, i.e. that high inflation today automatically means lower inflation tomorrow,” writes Shahab Jalinoos, head of FX trading strategy at Credit Suisse, in a Wednesday research briefing. 

“Given the tax and energy price shocks UK consumers are facing won’t show up clearly in spending data until June at the earliest, a state of suspended animation for GBP can persist until then. But ongoing carry advantages over EUR should give it a modest edge, even if that is lacking vs USD” he adds.

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But Sterling’s losses deepened after the Euro rallied with building momentum and likely due to a number of reasons including misplaced optimism in the market about events on the ground in Ukraine, Eurozone inflation developments and the stance of European Central Bank (ECB) monetary policy. 

“For our part, the ECB has made it clear that, in the context of the ongoing conflict, we will take whatever action is needed to pursue price stability and safeguard financial stability,” President Christine Lagarde said  at the National Bank of Cyprus on Wednesday. 

“We have also put in place a policy response which is tailored to the uncertainty we face today. As I explained last week[7], the best way that monetary policy can navigate this uncertainty is to emphasise the principles of optionality, gradualism and flexibility,” President Lagarde also said.

Above: Pound to Euro rate shown at weekly intervals with selected moving-averages. 55-week average shown in blue. Click image for closer inspection.

Official figures confirmed on Wednesday that Spanish and German inflation rates surged much further than markets had expected during March, indicating upside risks around this Friday’s figures for the broader Eurozone, which might also be an upside risk for the Euro.

"We advise against chasing the EUR higher for now. The EUR can nevertheless remain resilient, however, because of the latest rally of EUR rates and EGB yields that has been fuelled by hawkish ECB comments ahead of the March HICP data release on Friday," says Valentin Marinov, head of FX strategy at Credit Agricole CIB. 

"While the efforts to end the war in Ukraine can help shift the market focus towards other, more EUR-positive fundamental drivers, a sustained EUR rebound would require clear evidence that the war in Ukraine is drawing to an end," Marinov also said on Wednesday.

Consensus among economists had already envisaged the main Eurozone inflation rate rising from 5.9% to 6.7% for the March month even before estimates of Spanish and German price pressures proved to be too low. 

ECB policymakers have made increasingly clear since the March policy decision that they're keeping all options open due to inflation and so have not ruled out a decision to draw a line under the multi-year era of negative interest rates in the near future.