Next Target for GBP/EUR Exchange Rate is 1.50 say the Charts

GBP/EUR has entered a familiar pre-financial crisis range which suggests new highs around 1.50 are now possible.

A sharp decline in the pound / euro exchange rate at the beginning of this week appears to have been reversed in the mid-week session with the pair having moved higher to 1.4270 at the time of writing - however this is still far below the year's best above 1.44.

A positive set of Bank of England MPC minutes from the July meeting appear to have caught the market's attention.

A general absence of economic data and events of substance has allowed a corrective move higher in the euro exchange rate complex in which traders have exited the market after booking profit on the recent move lower.

Concerning the outlook we note a significant development has shaped up: The GBP-EUR has broken back to the longer-term range it enjoyed prior to the financial crisis of 2008.

A move back into this old range will give us clues as to where the exchange rate could head assuming we have indeed found the new normal once more.

The below indicates that there exists a range above 1.40 and below 1.50 that could be taken to represent a 'sticky' fair value zone for the exchange rate:

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This is exciting for those holding British pounds and looking to buy euros as it suggests that door to an exchange rate of 1.50 is now wide open.

Losses below 1.40 now become significantly less likely as the markets would see moves below here as representing an under-valued pound sterling.

“Having established itself beyond previous resistance (now local support) at 1.4250 in recent days risk exists for further direct Sterling strength as prices approach the psychological 1.4500 level next,“ notes Lucy Lillicrap, an analyst with foreign exchange brokerage AFEX.

Studies conducted by AFEX suggest there has been enough compression in the sterling / euro rate to enable an eventual extension nearer 1.5000.

“Thus even if an initial foray beyond this 1.4495/05 nearby supply band fails any subsequent set-back should be relatively prove short-lived. Strong buying interest extends down towards 1.4100 and technical indicators suggest a break of the now distant 1.3940/50 zone is necessary to damage this bullish outlook,“ says Lillicrap.

Why the Euro has Strengthened Over Recent Days

While the longer-term outlook favours the pound sterling over the euro, we note the latter has strengthened. Why?

Sovereign bond yields are the MOST important driver of exchange rates at the present time. Higher bond yields = a higher currency.

For the euro we note the German yield curve has steepened with yields up to 3.9 bps higher - the euro has risen in response.

Driving German yields higher will be the improvement in Greece:

Rating agency Standard & Poor’s raised yesterday evening the credit rating of Greece by two notches to CCC+, saying the European bailout reduced the chances of the country defaulting on its massive debt during the next year. The outlook was also upgraded from negative to stable.

Lloyds Raise GBP/EUR Forecasts

We have meanwhile heard that Lloyds Banking Group have upped their projections for the pound to euro exchange rate owing to the recent strength seen in sterling.

However, the latest research note on the matter suggests those looking for a better rate of exchange should get the timing right as the GBP will start falling back against the euro in substantial fashion in 2016.

This is largely because the Eurozone's economic performance is expected to pick up pace while the UK's economy plateau's as the UK government cuts back on spending.