Boris Johnson Prompts Multi-Year Lows in Sterling as he Enters the EU Referendum Fray
Despite the headlines at the start of the week the decline in the British pound against the euro was nothing news. That does not mean that GBP is out of danger just yet.
Sterling is still yet to close below the 1.28 support level against the euro, and until it does we would be cautious on becoming too negative.
While we are still sure the move will come we urge patience as the currency simply refuses to close below here.
The inability to end a day below here in 2016 betrays a formidable amount of buying interest by options traders.
Studies confirm that in the medium-term the outlook for sterling remains biased to further losses with the decline likely to accelerate should the 1.28 support zone give way.
The pound to euro exchange rate is seen at 1.2779 on Tuesday, below that key level of support we have mentioned but as our forecasts below show, all is not lost (just yet).
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Pound to Euro Forecast: 1.28 Support Being Tested
The weekly chart still shows limited down-side availability for GBPEUR until the 1.28 support zone gives way.
The pair has reached substantial support at this level which coincides with the 200-week moving average.
It has also reached the minimum target calculated using the height of the pattern extrapolated below the neckline at roughly 1.2700.
Therefore, there still remains a possibility of further upside developing as the exchange rate bounces off this sturdy support cluster.
If, however, there is a deeper penetration below the 200-week moving average then the 1.2500 level is seen as the next target, beyond that an extension down to 1.2310.
The daily chart shows the pair falling inside a descending channel:
It has reached support, however and is currently consolidating, in what might be a triangle formation.
If the triangle breaks lows and moves below the 1.2670 lows that would confirm more downside, however., the 200-week MA at 1.2635 would be expected to check down-side momentum and preventer a deeper penetration.
A break higher would not suffer the same restrictions, and so a move above 1.3052 would probably reach 1.3150, just below where the 50-day MA is situated, and likely to produce tough resistance.
Rebounds Could Catch us by Surprise, But Seen as Corrective
GBP/EUR is yet to confirm any meaningful low despite the noise being made over the declines.
One senses that there is a great deal of hype being read into the market.
While the trend lower could continue it would be unwise to discount a recogrey.
"If the market can re-accumulate hereabouts, i.e. either side of 1.2850, and subsequently establish itself back beyond 1.3025 resistance as well this awaited sell-off could be postponed for several more days but rebounds are nevertheless still considered corrective and any loss of 1.2645/55 would expose 1.2515/25 next instead," says Lucy Lillicrap, risk manager at Associated Foreign Exchange.
Boris Johnson Announcement Blamed for GBP Weakness
The major global market focus has been on the Brexit threat over the past 24 hours with the possibility that the UK might leave the EU in the vote that has been set for 23 June.
Polls are mixed with a slight inclination towards a 'stay' vote.
But the exit camp has been bolstered by the support of London Major Boris Johnson, resulting in some sharp sterling losses at the start of the week.
"Brilliant Boris Johnson offers hope - articulate & passionate! He's right! This is 'Last chance saloon' to grab back control of our destiny!" says David Buik, a prominent City veteran who now works at brokers Panmure Gordon.
Whether or not Johnson swings the vote in favour of an exit remains to be seen. We sense that commentators have misread the situation and placed too much emphasis on Johnson's intervention.
They knew before the weekend that Johnson was highly likely to join the Out camp and believe we are simply witnessing a rebalancing of the books by traders now that they have a date to trade towards.
The Euro Faces a Big Test Ahead
Those with a mult-week view should be aware that the ECB will become increasingly important, particularly if markets settle down on the EU referendum front.
The GBP to EUR conversion’s best shot at any kind of meaningful rebound lies with the ECB pulling something impressive out of the bag in their March meeting.
Expect speculation to increase as we head towards the date.
ECB Vice President Constancio told a Reuters Newsmaker event in New York that ECB actions have overall been positive for bank profitability but that he is also looking at “what can be done if we decide to ease further, we will have to mitigate the effect on banks as other countries have done.”
Analysts at Citi reckon this could be a hint at a tiered rate policy.
We have listed ten policy options open to the ECB in March here.
An example would be that currently deployed by the Bank of Japan whereby existing current account balances will earn a 0.1 percent positive interest rate.
Required reserves held at the central bank by financial institutions will earn zero interest.
Any additional current account deposits would incur the minus 0.1 percent rate.
The best shot the ECB has at capping the strength in the euro almost certainly lies with the ability to surprise markets. We have a feeling the March meeting will deliver fireworks.
