GBPEUR Forecasts Eye a Fall to 1.35

The British pound to euro exchange rate (GBP-EUR) remains under pressure in mid-March as profit-taking on the 2015 rally steps up a gear.

Mid-week we saw the sterling euro rate trading a full percent lower on a day-to-day comparison at 1.3802 - this coming on top of the previous day's percentage decline!

We are on course to witness the first weekly decline in sterling euro for 7 weeks; despite the recovery seen on Thursday morning which has yet to convince us that we are seeing a bottom to the falls.

If indeed this is a negative week for the pound euro rate, it will be only the second time in 2015 whereby sterling ends the week at a lower footing than where it started against the euro.

As we can see, the 1.42 area failed to give way to fresh gains and the selling has come thick and fast, particularly after the release of the March MPC minutes from the Bank of England:

The above 1hr chart shows that a top to the longer-term gains has been reached, and there is no obvious pattern yet available that would indicate to us where the declines may come to rest.

However, as we report below, there are some out there who are willing to make a call on where the sell-off could end.

One thing many in the market are in agreement over is that the current GBP sell-off and EUR rally is well overdue.

Advances such as that seen in GBPEUR over recent weeks are rarely sustained long-term and eventually some consolidation must occur as the market runs out of buyers.

The longer-term trend remains higher with all major momentum and technical signals advocating for more gains.

The current correction could start to lose paces as those positioning for longer-term gains enter the market at these cheaper levels.

Please note, that all levels mentioned here refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally. However, an independent provider will seek to undercut your bank's offer, thereby delivering up to 5% more currency in some instances. Please learn more.

A Daunting 50 Days Ahead for GBP

For the British pound (GBP) increasing coverage is being dedicated to the risks posed by the upcoming general elections.

Add to the release of all-important wage and jobs data mid-week and we can understand why the sharp edge of the sterling rally has been blunted.

“Lots of risk looms Wednesday when Bank of England minutes come due along with a fresh round of employment figures from Britain – all of which could be overshadowed by the Fed’s afternoon policy announcement and press briefing by Chair Janet Yellen,” says Joe Manimbo at Western Union.

The next 50 days look daunting for sterling with the risk of a hung parliament on the rise ahead of Britain’s May 7 general election.

“GBP buyers want to hedge their exposure in a way that allows for participation should the pound continue to grind downward. A way to do that, for example, would be for buyers to cover half of their need over the next six months with forward contracts,” says Manimbo.

Forecasting a Decline to 1.35 in Sterling Euro

Giving us a figure to aim for in GBPEUR is Thomas Harr at Danske Bank who has released a note to clients indicating that the currency pair could fall as low as 1.35 in this period of consolidation.

However, the first target that could arrest declines is 1.3691.

“The market has become overextended, as evidenced by an extreme 14-day RSI reading and scope is now growing for a more substantial rebound off the 11 March 1.4257 high,” says Harr.

Should the rally resume Harr is looking for a breach of 1.4507 as a trigger for the next major leg higher.

Dollar Rally Hits the Brakes

The euro is also seen enjoying gains against the US dollar taking it off 12 year lows.

The euro also found a mild positive from signs of improved confidence among German investors.

The nation’s influential ZEW survey of investor optimism brightened to a 13-month high of 54.8 for March from 53.0 in February.

“Though better, the reading was below forecasts of 58.2 with ongoing worries about turmoil in Greece and Ukraine cited as holding back confidence. EUR buyers continued to enjoy a very favourable market with the euro down 25 percent since last May and 12 percent weaker since the start of the year. Customers can secure these gains and bolster profitability with forwards and options,” says Western Union’s Manimbo.

While the euro appears to have the edge at the present time we would caution that we see this as a counter-move within the broader trend.

The downside is forecast to ultimately resume.