Pound / Euro Exchange Rate Could Soon See Fireworks

Currency markets could soon prompt a massive move in the British pound to euro exchange rate – are you ready?

We have reflected on a number of occasions in June that the GBP-EUR rate has been moving sideways as markets await the trigger for a stronger trend move higher or lower.

In mid-week trade GBP-EUR is testing 1.40 once more following some strong wage data and signs that the Bank of England's MPC may soon have to consider raising rates.

The run-up to the May-June period of consolidation saw strong British pound gains confirming to us that the longer-term bias remains in sterling’s favour. The wage data and sterling's response confirms that the upside is preferred.

Could we therefore be witnessing the coiling of a spring before a resumption of the move?

Yes, suggests analyst Christopher Vecchio, a Currency Strategist, at DailyFX, who reckons recent changes in the speculative markets mean there is a huge amount of cash sitting ready to be placed into euro-negative bets.

Therefore the structure of the market is such that a flood of money is now available to fall behind the GBP-EUR exchange rate and we could see the pair break up above the resistance barrier at 1.41-1.42.

This would allow climbs towards 1.45 where many institutional forecasters see the pair heading in coming months based on fundamental studies.

Those looking to capitalise on higher rates should contact an independent dealer immediately and set a buy order for higher rates. Doing so will also see you transacting at tighter spread from the market rate than your bank would offer. Tighter exchange rates on international payments can see up to 5% more currency being delivered in some cases. Learn more.

Vecchio confirms fireworks could lie ahead for the euro exchange rate complex:

"Absent concrete developments out of Greece, FX markets are starting to get ready for this week's scheduled fireworks. Those fireworks are the June FOMC meeting, of course, and market participants are evidently split on which way policymakers will break. There's either enough improved data in Q2'15 to declare that the slowdown in Q1'15 was transitory, or there's not and the probability of a rate hike this year is low.

"Given the growing threat of a tail-risk event revolving around Greece, and the possibility that the Fed takes on a more optimistic tone about the US economy, one can't help but feel that the massive reduction in Euro short positioning in the futures market (there were 138.0K net-short contracts held by speculators for the week ended June 9, nearly half of the level at the all-time high on March 31, at 226.6K net-short contracts) means that there's a considerable amount of cash on the side-lines that could come into play to dictate a major swing in price."

We see any moves lower in EUR-USD being mirrored by EUR-GBP.

The reason EUR-USD and EUR-GBP would move in tandem rests with the observation that both the UK and US are likely to pursue pro-currency interest rate rises within the course of the next 6 months.

There have been suggestions made that the UK will only raise rates following a similar moves at the FOMC.

“We maintain our view that the BoE, facing the current tide of global easing, will be unwilling to move before the Federal Reserve. The current uncertainty around the timing of the Fed’s first hike leaves the BoE in no rush to try and start guiding the market on potential rate hike timings. Both the UK and the US face a similar conundrum of continued strength in the labour market but a stalling of growth in Q1 relative to expectations,” says Sebastien Cross at Bank of America Merrill Lynch Global Research.

For that reason, we, and many in the markets, see the US rise as the starting gun to a UK interest rate rise.

The starting gun on the US rise could in turn be fired on Wednesday the 17th, as such the pound could advance against the euro should a September US rate hike be put on the cards.

We would suggest those readers with currency payment requirements on the euro markets ensure their brokers have the relevant stop-loss orders in place should markets reverse sharply on an unseen disappointment from the FOMC.

Likewise, those looking for a stronger pound euro exchange rate could place buy orders at higher levels to capture a better level.