Pound / Euro Gains Forecast by Morgan Stanley as 1.40 Resistance Approaches
Investment bank Morgan Stanley are so confident that the British pound will rise against the euro they have initiated a trade recommendation on the currency pair to clients.
The call comes as the pound sterling continues its recovery from the mid-May low of 1.3362, the rally higher took GBP-EUR back to 1.40 where buying interest quickly dried up. Indeed, this level has proved to be the high-point for the currency pair on three occasions in 2015 and is a major roadblock to any further strength.
Those watching the market and hoping for a better exchange rate will however be encouraged by the latest Morgan Stanley report; analysts at the bank have told clients they favour sterling to deliver further gains now that the UK elections have passed. The euro is one currency that expected to be particularly prone to GBP strength.
At the time of writing we note the pound to euro exchange rate conversion is at 1.3946 with gains coming despite April inflation data which diappointed to the downside. While Morgan Stanley take a bullish stance we get the feeling that sideways action may be the order of the day unless a break of 1.40 is made, and importantly, held.
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Why the GBP is Forecast to Advance Against the EUR
Now that we have entered a post-UK election period, Morgan Stanley’s Hans Redeker says he likes the idea of ‘scaling’ into long GBP positions against EUR. Cyclically the UK is in pretty good shape - the key is to focus on the services sector, which makes up 70% of the economy.
The services PMI rose to near 60 in April and average weekly earnings (ex-bonuses) for the service sector accelerated to 2.5%.
“In sympathy, the BoE projects only a small amount of spare capacity at 0.5%, which we expect to close over coming quarters. And even though front-end rates have risen in recent weeks, we still expect an earlier BoE hike and faster pace of hikes than the market is,” says Redeker.
If currency markets start to adopt the same view that an interest rate rise is approaching we will surely see the British pound re-priced at higher levels against the euro. It is because of this that we see no reason why trade in the second half of 2015 should not dominate levels above 1.40.
Morgan Stanley don’t buy the idea that UK growth is slowing down, a view adopted by many in the market and confirmed by upside surprises in some of the data we saw over May. For now then we await June’s data to convince others in the market that the economy continues to tick on at a strong pace.
The Trade
This is how MS will be approaching a speculative trade on EUR-GBP in light of their pro-sterling stance:
“We sell EURGBP at 0.7340, just below the 61.85% retracement level of the 5- wave structure shown here, where there is a completion of the 2 nd wave. We put a stop just above the recent high at 0.7500 and target just below the March low of 0.70. Initial downside momentum will be triggered on a move below the recent low at 0.7122.”
Could Greece Break the Stalemate in GBP-EUR?
Remember we pointed out that the sterling remains caught in a sideways move against the euro? To achieve any kind of upside traction we would need something of a game changer to coax sterling higher. Perhaps a communication that the Bank of England is keen to raise interest rates in 2015. Alternatively, those hoping for a stronger exchange rate will need a decidedly EUR-negative event to boost the pair.
One such event could be a deterioration in the Greek situation. The saga over how Greece plans to pay its way in the Eurozone continues, and this is allowing a degree of fatigue to set in we feel. Guard against complacency warn Barclays who see Greece as being a live and real threat to the euro exchange rate complex.
“Despite recent reported progress between Greece and its creditors, we think a significant gap remains. While an agreement without a political disruption is still possible, we think this is becoming increasingly unlikely. An agreement with some form of a political disruption seems most likely and should weigh on the EUR, in our view,” say Barclays.
In terms of data due out of the Eurozone this week, the consensus expect euro area final HICP headline and core inflation (Tuesday) to be confirmed in April at 0.0% and +0.6%, respectively.
The euro area flash composite PMI (Thursday) is likely to edge down in May to 53.9), due to lower manufacturing confidence (consensus: 51.8). Services PMI should hold firm at 54.0 (consensus: 53.9).
