GBP/EUR Selling Halts at 200 Week Support and Brexit 'Shock and Awe' Fades

The GBP to EUR conversion is potentially setting itself up for a rebound as it meets a key long-term support level and some market participants see the recent Brexit-inspired decline as exaggerated.

The pound succumbed to 14 month lows against the euro this week and was seen fast approaching the 1.2595 number where the 200 week moving average can be found.

We forecast that this zone is where major buying interest would be triggered by markets as key techincal areas like this tend to attract focus.

A moving average is the average average exchange rate for the GBP to EUR over the past 200 weeks.

It is not uncommon to see an exchange rate that has been falling stop its decline and reverse direction once it hits the support of a major moving average.

A move through a major moving average is often used as a signal by technical traders that the trend is reversing. Therefore, the pound’s long-term uptrend remains alive as long as it remains above the 200 week moving average.

If the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.

Karen Jones, technical strategist at Commerzbank says the GBP/EUR may find relief when it meets the 200 day moving average.

Indeed, a let-up in the relentless pressure posed by Brexit, when combined with the price's clash with the moving average, could offer the opportunity for a GBP relief rally.

It is not uncommon to see support kick in ahead of the actual perceived support zone being met, this is because many traders would rather have their orders triggered in the run-up to the support zone rather than miss it had selling pressures eased at an earlier point.

This appears to be the case here; enough traders have placed by orders in the run up to the 200 week moving average to arrest the trend.

Brexit Narrative Waning

The technical picture is aided by a shift in sentiment towards sterling, in short there is a feeling that the negatives of Brexit have been rinsed.

“Now that the 'shock and awe' factor of a potential 'Brexit' has coursed its way through the system, investors have a chance to recalibrate their short-term concerns with longer-standing, overarching thematic influences,” says Christopher Vecchio, Currency Analyst, at DailyFX.

We saw some solid GDP data released out of the UK on Thursday; this is the kind of data that reminds us that the pound sterling is trading well below its fundamentals.

"More generally, we think that estimates published by various commentators recently suggesting a big negative short-term hit to the economy from Brexit are overdone. Admittedly, the net impact would probably be negative. But we think that growth would be only a bit lower this year and next than would otherwise have been the case," says a forecast note from Capital Economics released on Friday.

Nevertheless, despite the strength of support posed by the 200 week moving average Jones reckons a breach will ultimately occur and she continues to maintain a strategy that targets an achievement of 1.2453/1.2422.

Commerzbank believe the euro remains preferred to the pound as long as GBP/EUR trades below the 2 month downtrend at 1.2968.

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.

 

Robin Wilkin, analyst with Lloyds, sees the longer-term support zone as being lower than the 200 week MA, as proposed by Jones, and thus sees the potential for further falls.

Longer-term support is seen at 1.2510-1.2195 and uncertainty around the EU referendum, "is likely to keep upside potential in GBP limited for now," says Wilkin.

If you want to call the end of the downtrend then Wilkins suggests the pound must advance above 1.30 once more in order for him to be convinced that the tide has turned.

UK / EU Vote: Why is the Worst-Case Scenario Only Being Discussed?

There is a growing feeling in some quarters of the foreign exchange community that the British pound has been punished unnecessarily hard.

As DailyFX’s Vecchio points out, the current pause may be attributed to emotions subsiding and logic prevailing.

“FX markets especially have been treating the Brexit headline since Sunday as an indication that the UK would leave the EU entirely, not that it would be opening up a two-year negotiating window to amend its status,” says Vecchio.

The analyst suggests there should be more focus on the implications of the UK perhaps realigning itself more like Norway or Switzerland.

“That's to say the worst case scenario is only being discussed; none of the more likely intermediate options are,” says Vecchio.

Buy the Pound

Analysts at DNB Markets, the Norwegian investment bank agree.

In a strategy note to clients chief strategist Magne Østnor says the recent sell-off in GBP is “exaggerated” and a result of several potential risk factors materialising at the same
time.

“We expect to see a bumpy improvement of the global risk sentiment, the start of Cameron Bremaincampaign reducing Brexit risk and interest rate expectations to rise. At the other side of the English channel, we expect Draghi to act on his guiding of further stimulus, keeping the EUR under pressure,” says Østnor.

DNB Markets have announced they are looking to sell the EUR to GBP exchange rate at 0.7880 and target a decline back to 0.73 with a stop-loss placed at 0.81 should the pound fall yet further.

In GBP to EUR terms this equates to a buy trade entered at 1.2690 targeting a recovery to 1.3698 with a stop-loss placed at 1.2346.