Pound Euro Exchange Rate: The Rally is Dead

Latest forecasts for the pound to euro exchange rate (GBPEUR) suggest the uptrend may have finally ended for now.

UPDATE: Strong end to March seen on Carney, Broadbent comments

The comeback in the euro exchange rate complex has been strong – but it should certainly come as no surprise owing to the incredibly oversold nature of the euro.

The decline over recent weeks has been brutal and clearly ahead of analyst expectations with pre-2015 forecasts for GBP v EUR looking woefully inadequate.

For those hoping for an even stronger pound sterling all good things must ultimately come to an end and many will be kicking themselves over having missed out on recent maximums.

The pound euro rate now remains well under its 21 day moving average – a line that is drawn at 1.3848. This indicates that momentum in shorter-term timeframes is lower.

The next level of support to the selling pressure resistance is seen at 1.3533. This represents the 50 day moving average and is the line it must stay above to keep the longer-term rally alive.

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The Rally has Died... For Now

According to analyst Lucy Lillicrap at brokerage AFEX the cessation of buying interest in sterling has evidently topped the pair for now at 1.4250.

This now becomes the resistance point that must be broken before the next move higher in GBP-EUR takes place.

However, Lillicrap notes that the broader technicals are still positive and on this basis declines are likely to be relatively short-lived.

In a forecast note to clients at the start of the new week the analyst says:

“Fresh rallies are likely to encounter selling pressure around 1.4100 as well but re-emergent weakness has support in the 1.3700 and then 1.3550 areas (below which downside risk appears limited).

“Once Sterling values have digested the past few weeks’ gains another examination of 1.4250 should develop with upside potential nearer 1.4500 –and ultimately 1.5000- thereafter. Only an unexpected loss of the distant 1.3175 level beforehand damages this preferred underlying Sterling positive tone.”

British Pound Less Attractive

The GBP has come under pressure lately as the fundamental picture surrounding the currency darkens.

Uncertainties linked to the upcoming UK general elections should likely weigh on the GBP.

However, more verbal pressures from the Bank of England hint that further GBP appreciation would be a threat to the inflation outlook.

On 12 March in a speech to a business audience, BoE governor Mark Carney stated that "it may be appropriate to take into account persistent external deflationary forces arising from the combination of continued foreign low inflation and the protracted effects of sterling's strength" on UK CPI.

Then in mid-March chief economist Andrew Haldane really put the boot into sterling when he said the prospect of an additional interest rate cut to below 0.5% should not be ruled out.

Part of the reasons behind GBP strength since the start of the year come from portfolio allocations as most central banks in Europe have pushed rates into negative territory.

This has resulted in a divergence in relative monetary policy which have supported inflows into GBP.

While cutting rates or expanding QE seem extreme responses, the Bank of England is left with the option to push back rates hikes expectations.

“Given the influence of EUR/GBP in UK's inflation outlook, the central bank is likely to postpone any early rate hike and even wait for the end of the ECB's QE in order to limit the attractiveness of the British pound,” says Luc Luyet, an analyst at Swissquote Bank.

We see the current bout of weakness as being long-overdue and necessary to sustaining any longer-term move higher.

This does however require patience to be exercised by those hoping for even more sterling strength while those looking to sell their euros should take full advantage of this period of relief.