Euro to Pound Sterling Falls Confirming the Pair as Perfect Range Play

The euro to British pound conversion (EURGBP) appears to have hit a brick wall as its May-June recovery stalls at what is now a well established barrier.

The euro has lost its advantage against the pound sterling and the majority of G10 rivals following a strong move higher over late May / early June.

Indeed, our latest EUR-USD analysis shows the euro to be struggling at the 2014-2015 downtrend, could this be dictating movements elsewhere in the complex?

We think moves in EUR-USD are extremely important for the entire exchange rate complex, however the EUR-GBP has its own difficulties which will only add to the sense that the tide is about to turn on the May-June rally.

As we can see the currency pair is becoming quite predictable and has turned into a sideways-moving range play:

Because the euro remains caught in such a well-defined range against the pound it gives us confidence in calling where it may be headed next on technical observations. As the above suggests the exchange rate could now be headed lower towards the 0.7100 region.

However, the above graphic also warns that we would face a period of protracted strength or weakness should the range be broken to the upside or downside.

At the time of writing the euro to pound conversion (EURGBP) is quoted at 0.7285 on the open market.

High street banks are offering the euro in the region of 0.700 while independent international payment specialist offers are seen around 0.7235 region.

Consolidation and Resistance Forecast

We are getting the sense that the euro’s strength may ultimately come to an end due to technical exhaustion with the rally now becoming over-extended.

The EURGBP has powered higher since the 27th of May when a low of 0.7055 was achieved, this zone of support forms a base beyond which selling interest just can’t be sustained and bargain-hunters step in to pick up cheap euros.

The resultant buying pressure has taken the market back up to 0.7373 where it is quoted at present.

Ahead lies 0.7400 – an area that has thwarted buying interest since March. We are seeing signs that this level could once again be the undoing of the euro.

“We believe EURGBP is in a wide consolidation range, but weaker UK data could see the cross push up through 0.7400 towards more meaningful resistance in the 0.7475-0.725 region, which incorporates the recent highs set in early May, pre-UK election,” says a note on the matter issued by Lloyds Bank.

Analysts believe that area should cap the upside again with the QE programme and Greek worries eventually re-weighing on the EUR.

0.7260/55 is pivot support in this regard, with a decline back through there suggesting a move back to the range lows.

If the aforementioned resistance points are broken by a continuation of the euro’s strength then many in the market could well start considering the euro to hold the advantage and call the end to the British pound’s recent reign of supremacy.

More Euro Strength is Possible

Fundamentally speaking, underpinning the euro is a continued improvement in data releases confirming that the European Central Bank’s quantitative easing programme may be working.

The ECB is looking to pump over a trillion euros into the Eurozone economic area by buying up government bonds, the hope is that this cash injection will boost economic growth.

If economic data continue to improve the ECB could well bring forward the date for the termination of the programme, which is currently set for September 2016.

Such a turn of events would light a fire under the euro which could well push the pound to euro pair (GBPEUR) down to 1.30 and then lower.

Troubles Ahead?

We have already spoken about the improvement in economic activity driving buying interest but, “the value that was added to eurozone stock markets on the back of QE is quickly being eroded due to Greece, and with the payback deadline looming dealers are doing their utmost to get out,” says out David Madden at IG pointing to the ever-present threat that is Greece.

There is however talk of a 9 month extension being placed on impending payments, this could buy the country more time and stoke a fresh buying spree of euros if this is confirmed.

For now though we lean on the side of recent history – we expect the sideays-trending range to hold and the pound sterling to regain the initiative as buying pressures on the euro become fatigued.

Indeed, UK domestic data releases for the week beginning the 8th of June has come in ahead of expectations allowing the GBP to rally, reinforcing the technical plays mentioned in this piece.