Buy EUR / GBP say Societe Generale Citing Technicals, EU Vote Risks

The euro to pound exchange rate is forecast to maintain an upward bias and speculators should take advantage suggest analysts at Societe Generale. Commerzbank meanwhile see 0.8050 written in the charts.

The euro has been in the ascendency against the British pound since early December; a move that could well accelerate argue Societe Generale.

Strategists at the French bank base the rationale on the observation that the euro continue to outperform its cross-channel rival in times of market negativity.

And, as anyone who has been watching global markets of late will know, markets are skewed to the downside and any suggestions that the worst has passed us by would seem premature at this juncture.

Further rationale for the call rests with the observation that the Brexit issue continues to brew in the background providing a further source of uncertainty for pound sterling.

Indeed, the temperature is soon to be turned up with the European Council meeting on 18-19 February potentially proving pivotal to finding a mutually satisfactory solution.

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Should the February meeting go to plan for Prime Minister Cameron then the referendum could be held as soon as June as the PM will be keen to get the UK to the polls before an expected surge in immigration.

As Barclays have noted in their most recent research on Brexit immigration is the single most decisive factor in influencing the vote. (Barclays say they see the pound heading higher against the euro long term in the event of an out vote.)

“Our previous Brexit hedge targeted a Q4 referendum and is already in the money. A more tactical approach may now be appropriate in the current context of acceleration,” says Olivier Korber at Societe Generale.

Further backing the Soc Gen strategy is the technical observation that EUR/GBP is now breaking the 0.7750 resistance.

“A sustained move above will signal an extension towards the September 2014 highs of 0.8070/0.81,” says Korber.

Expanding on the technical setup in the EUR to GBP conversion is Head of Technical Analysis Stephanie Aymes who notes that after achieving crucial support at 0.70/0.68, EUR/GBP has embarked on a recovery.

"The pair confirmed a double bottom and is now breaking above graphical resistance levels at 0.7750. A sustained move above will signal extension in recovery towards September 2014 highs of 0.8070/0.81. 0.75/0.7450 should be an important support," says Aymes.

Euro Exchange Rates Benefit from Negative Market Conditions

As mentioned, one of the key assumptions behind the Soc Gen trade is that negative market conditions remain in place; a scenario that benefits the euro.

This is exactly what we are seeing at present.

Concerns over financial stocks have added to the already hefty punishments handed out to energy stocks to ensure selling remains the preferred strategy.

The euro to pound sterling exchange rate has risen 0.7827 after tapping a high of 0.7897 while the euro to dollar exchange rate is back above 1.23.

The charts confirm that momentum still favours the euro against sterling as the below chart confirms:

If we are to stick with the trend and assume it will win out then expect further equity price declines and euro gains in coming days.

Note that the exchange rate is trading above the three key momentum lines, a highly bullish signal. We would look for it to break below the green line (20 day moving average) before suggesting the uptrend is stalling.

Karen Jones at Commerzbank says the euro to pound exchange rate remains on target for 0.8030/50, this is the measurement higher from the base 0.7492-0.6937 it is also a Fibonacci retracement and we would expect to see initial failure in this vicinity.

0.8030/50 translates into a GBP/EUR target at 1.2453/1.2422.

The base 0.7492-0.6937 offers an upside measured target to approximately .8030/50. "Dips should find support at .7658 20 day ma and the 0.7596 short term uptrend," says Jones.

This view is echoed by our own Joaquin Monfort who has just published a note on the matter.

The ECB Will Attempt to Stop This Euro Rally?

The ECB will be uncomfortable with recent moves in the euro complex as the more expensive currency in turn makes European produce more expensive on the global market. 

One way of prompting a potential decline in the euro, it is argued, is to scrap the €500 note.

Of course this will not provide the big move that the ECB requires, but anything will do at present as the effectiveness of continually cutting interest rates is being questioned. 

"We are increasingly in a world where negative rate expectations continue to grow, this comes as the debate about the effective lower bound of rates continues to be redrawn," says Jeremy Stretch at CIBC in London, "however, in the current risk-off environment even the expectation of a more aggressive ECB is currently insufficient to prevent EUR safe haven related gains."

Stretch says he would be unsurprised should the ECB cut the deposit rate by more than expected next month, look for perhaps 20bp, taking rates to -0.50%.

Such a move would equalise the deposit rate with that in Sweden, this comes after the Riksbank proved unexpectedly aggressive earlier today.

"The downtrend in euro area inflation expectations, the 5y 5y forward euro inflation swap has traded new fresh lows today, at 1.40% underlines increasing presumptions of the ECB being forced to be more far more aggressive than back in December. Remember they failed to meet, albeit lofty, market easing expectations," says Stretch.