British Pound / Euro Rate Breaks Above Key Level but we Forecast Move to 1.25 Over Coming Weeks
The pound to euro exchange rate bounced on Monday, just as we forecast. Where next then?
The pound has risen against the euro for four consecutive days now but it was Monday's jump that gave the recovery rally some much needed steam.
We warned on Friday that this situation was likely as the pair was technically oversold and the Brexit debate had done its worst, for now at least.
On Tuesday we are seeing the best exchange rate since the 24th of February for those with pound to euro payments.
Sentiment has turned in favour of sterling over recent days.
"GBP depreciated significantly last week as perceived risks of an EU exit increased. We maintain our view that the agreement was a positive development, EU exit risk has negative implications for the EUR," say Barclays in a foreign exchange forecast note released ahead of the new month.
Barclays expect the GBP to EUR pair to correct higher as a result.
Barclays confirm some reversal in recent GBP weakness against the USD is also possible this week given their above-consensus forecasts for the major UK data events out this week.
February PMI data will form the focus of the data calendar this week, if they beat expectations sterling will certainly find some more love.
Watch Manufacturing PMI on Tuesday; (consensus forecast: 52.3), Construction PMI on Wednesday; (consensus forecast: 55.5) and Services PMI on Thursday; (consensus forecast: 55.0).
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.
Technical Support Combines With Brexit-Boredom to Lift Tone on Sterling
The GBP has taken some serious beatings lately and is now over 6% lower than where it opened 2016. This is after the +-6% declines seen in the November-December period.
There are four main reasons for the negative developments in the sterling-euro exchange rate, all of which are interconnected; deteriorating global risk sentiment, weaker UK data, postponement of BoE rate hikes and Brexit fears.
We note here that a mighty level of support is coming into play in the form of the 200 week moving average which could well see the decline hesitate.
This is the average price the pound has traded against the euro at over the past 200 weeks and traders often tend to reverse direction when faced with such formidable levels.
Beyond the technicals we note that the Brexit story is becoming tired.
“Further significant Brexit-fuelled FX weakness is unlikely. UK poll are notoriously inaccurate while the illusionary supportive “facts” supporting in-or-out will quickly get discounted by the opposition. Therefore neither side will make a strong advance,” says a note from the Swissquote FX Strategy Desk.
Analyst Magne Østnor at DNB Markets says there is now a good chance that the pound sterling to euro exchange rate recovers to the 1.3698 area as 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.
Nevertheless, it is worth remembering that trend momentum is firmly pitted against sterling at this juncture, and for that reason strength is likely to be short-lived.
We mention that Swissquote believe further Brexit-fuelled losses in the GBP are likely to subside for now, however, this is no reason to become pound-bulls.
“We would short any GBP rallies as downside is attractive as Brexit risk premia remains despite extreme short GBP positioning,” say analysts at Swissquote Bank.
Kit Juckes at Societe Generale agrees that calling the bottom in the pound’s trajectory would be futile, and foolish:
“Between now and the vote, we’ll see GBP/USD closer to 1.30 and EUR/GBP above 0.80. Theres too much uncertainty for bargain-hunters to buy the pound.”
EUR/GBP at 0.80 equates to 1.25 in GBP to EUR terms, and aligns itself nicely with our early Feb forecasts for 1.25.
Euro Exchange Rates Slump on Inflation, ECB Nerves
The euro enters March from a position of weakness having been hurt by mounting worries about how a Brexit stoke simmering anti-EU sentiment across the 28-member bloc.
Then there is inflation data and the ECB.
"A renewed threat of economy-squeezing deflation taking hold in the euro zone weighed on the single currency, knocking it to one-month lows against the US dollar," says Joe Manimbo at Western Union, "the -0.2% preliminary reading of inflation for February put the fork in expectations for the ECB to cut interest rates or take other extraordinary action to keep the bloc’s economy from tipping sharply lower."
The ECB next meets on March 10 with expectations elevated for action in the wake of soft inflation and a dovish economic outlook.
The ECB’s 10th of March meeting is a ‘live’ one in that policy decisions are set to be announced.
"The stage is set for action at the ECB and we do not expect the euro to benefit in a major way over coming days as traders will be wary of exposing themselves to a currency that could be about to be battered by its central bank," says Manimbo.
But, More Losses for the Pound Against the Euro Ahead
Our forecasts made at the start of February warned for a move towards 1.25, and moves through February have confirmed us to be more or less correct as the GBP to EUR conversion hit a low of 1.2670.
So in early March are we seeing the bottom in GBP/EUR or can we expect more falls?
If you listen to UBS and HSBC the prospect of significant falls to parity now stand between 33% and 40% owing to the still elevated liklihood of an 'Out' vote in the June referendum.
This fundamental argument will ensure gains in sterling are short-term in nature.
There is therefore still some way to go by our calculations and relief rallies are ultimately likely to be short-lived.
