Pound / Euro: GBP Falls to Key Support Zone as Weakness Sets in

In the two trading days straddling the start of the new month we saw sterling lose more than 2% of its value versus the euro suggesting a period of weakness was establishing itself.

On Tuesday though the pound sterling is however back with a vengeance rising nearly 0.7% on a day-to-day comparison, almost erasing all previous losses. On Wednesday the euro is being bid higher following the release of a good set of composite PMI data which serves to confirm the Eurozone economy is finally improving.

For the GBP-EUR pair volatility is the only certainty it would seem.

On Thursday 7 volatility is tipped to increase yet further, the general election will be held and expect much fuss to be made by markets and commentators alike.

The polls are still evenly split between the Conservatives and Labour, confirming that chances of a majority government are slim; however, around one-third of voters are still undecided, which is unlikely to help the pound as currency markets crave certainty.

We see any volatility being temporary though because any major shocks to the UK economy are unlikely to be delivered by the main parties. We therefore choose to look through this noise and focus on other important issues driving the exchange rate.

The Outlook: Let’s Talk Technicals

The below technical picture on sterling v euro shows that those converting pounds into euros will have found the fall lower has been arrested at a key level:

At the time of writing the pound to euro exchange rate (GBP-EUR) is back down to this key support level at 1.35.

It appears that the above level of support is now being seriously tested and could yield to further short-term pressures.

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The Fundamentals: Volatility Ahead

Unfortunately, there could be a significant amount of volatility in coming days and high volatility tends to play havoc with technical indicators and those with currency requirements should be ready for an interest ride.

We noted at the end of April how the slump seen in German bund prices aided a notable rally in the euro sending sterling down to 1.35.

Further pressure was then added at the start of May thanks to a poor economic release from the UK’s manufacturing sector which has torpedoed currency market confidence in the resilience of the UK’s economy.

The UK economic picture does however, from whichever angle you chose to adopt, continue to outperform its Eurozone peer.

This on its own should ultimately ensure the longer-term outlook for the pound euro exchange rate remains firm.

On Thursday the UK goes to the ballot box to elect the next government and with little indication as to what the new government will look like uncertainty will likely undermine the UK currency.

Euro at Best Level in 2 Months vs Pound Sterling

It is however good news for those long-suffering euro holders.

For those with euros in hand looking to buy sterling, the EUR/GBP is trading around its strongest level in 2 months.

We should see these conditions persist for a few days at least; however should a clear outcome to the election emerge then we are betting on a strong recovery in the British pound.