GBP/EUR Forecast: GBP Ready to Rise Again
The euro has enjoyed a strong run against the pound sterling - but it should now be time to give up those gains argues a prominent forecaster.
“We continue to view that EUR/GBP at current levels looks increasingly mis-priced." - CIBC.
The pound to euro exchange rate could now be oversold following days of selling pressure.
The pound sterling has fallen from a high of 1.4386 in August to a low of 1.3946 – the falls have turned momentum around to favour the shared currency and we see the GBP/EUR balancing precariously on the 1.40 support level.
We have warned time and again that if this zone were to give way declines to 1.36 are a prospect and those with outstanding payments should consider locking in at least part of their payment at present levels.
So what has been driving sterling lower, and importantly will the negative forces continue to prevail?
Construction output data came in unexpectedly soft at the close of the week - June construction output data grew 0.9% in the month.
Currency markets sold sterling as they were expecting a reading of 2.0%, may suggest a potential drag on the first revision to Q2 GDP.
“However, we would underline the data series remain prone to substantial revisions and hence moves in the short sterling strip on the data should not be overplayed,” says Jeremy Stretch at CIBC in Canada.
Indeed, construction output only accounts for around 7% of UK economic output.
The Potential Trigger to a Pound Comeback
The upcoming week sees several key data points which will further impact rate expectations and hence Sterling performance.
“Expect renewed oil price fragility, alongside the ongoing supermarket price war, will maintain a dearth of inflationary influences,” warns CIBC’s Stretch.
Western Union’s Joe Manimbo reckons sterling will struggle: “sterling could struggle in the week ahead with U.K. inflation data on Aug. 18 expected to hold at zero, far short of the Bank of England’s 2 percent goal.”
However, the flipside remains rising real earnings, the results of which should prove evident in the July retail sales data.
The Pound now Undervalued against the Euro
CIBC believe June data weakness prove to be revised away, while continued UK consumption into Q3 underlines ongoing economic impetus, which will eventually cause an increasing headache for the BoE.
“We continue to view that EUR/GBP at current levels looks increasingly mis-priced, hence we favour looking for a re-treat back towards 0.6985/90. Only a breach of 0.7225 would cause us to reconsider maintaining a near term bearish bias,” says Stretch.
Turning the equation around, Stretch is looking for sterling-euro to recover towards 1.4316 and only a break 1.3840 would see the analyst ditch his pro-GBP stance.
At the time of writing the GBP looks determined to end the week on a positive note - we are noting the currency pair nearly half a percent higher at 1.4060.
EUR/USD Looks to Push Higher
The EURUSD is pushing higher on diminishing odds of a US September rate hike. In addition, the Greek bail-out provides some buying pressure to the pair.
We anticipate that this will only be temporary as new US rate expectations will come back. On the short-term, resistance at 1.1278 is at stake.
Strategy Ahead of the New Week
Sean Lee, a professional trader at Forextell, sets out his plan for the week ahead:
EUR/GBP: "Reversal– MT is sideways normal. Bearish reversal pattern off the top of the range presents selling opportunity in this market type."
EUR/USD: "Reversal – MT is sideways normal. Short off the top of the range after a reversal pattern formed on Friday. The divergent paths of the central banks should see this pair lower."
