Sterling Must Defeat Resistance at 1.42 Against the Euro for Further Upsid

The pound to euro exchange rate (GBP/EUR) fell back into its longer-term trend range against the euro suggesting the best exchange rate of 2015 may be behind us.

1.42 represents a formidable layer of resistance and any rates above here should be grabbed with both hands as they tend to prove fleeting.

The immediate outlook is dominated by support at the round number of 1.40 - should this area break then we could see a decline down towards the bottom of the range at 1.38.

The euro has regained the advantage as Greek related headline risk tails off and data improves - we saw frenzied buying on Monday on the back of better-than-expected IFO readings from Germany.

The IFO survey beat forecasts printing at 108.00 versus 107.6 but the euro was already well on it way higher prior to the report and the data actually created the final surge higher.

The GBP enjoyed a rally towards 1.44 in July ensuring those using sterling to buy euros did so at the best exchange rate since 2007.

The pound to euro exchange rate (GBPEUR) has since fallen back below 1.42 and into a range that has dominated trade since May:

At the time of writing the inter-bank market is quoting sterling/euro at 1.4082 with high street banks offering clients international payments at 1.3688.

Independent providers are much tighter on their spread and offer in the region of 1.3913.

GBP / EUR Looks to Keep Upside Momentum Alive

From a technical perspective we note the range between 1.38 and 1.42 looks seductive for GBP/EUR and this is where the pair looks most comfortable.

Any movements either side of the range could therefore be short-lived. Watch the defence of 1.40 for clues as to whether a further slide to 1.28 is possible.

As we approach the end of July though there are signs of buying interest picking up, moves back above 1.41 bring 1.42 into view but be wary that 1.42 represents a formidable layer of resistance and any rates above here should be grabbed with both hands as they tend to prove fleeting.

Fundamentally the prospects facing the GBP/EUR exchange rate remain positive with confirmation that the UK economy remains robust being confirmed by the release of Q2 GDP data on the 28th of July.

The strong growth in the economy could well start generating unwanted inflation over coming months and years unless the Bank of England starts raising interest rates.

Many analysts are now pricing in an interest rate around the turn of the year - something the currency markets could soon start doing.

If this is the case then watch the pound push back towards the 1.44 level, and perhaps even beyond.

Meanwhile the euro exchange rate family looks likely to fail in its quest to find any substantial momentum in coming months.

"We think the policy divergence theme remains firmly in place. Although we believe the bund sell-off increases EUR sensitivity to euro area uncertainty, we see a short EURUSD position as among the best to hold. We continue to expect EURUSD to trade through parity in early 2016," says a new forecast by Barclays.

Should the euro fall to parity with the dollar then expect the pound to take full advantage and move towards 1.45.