Euro Exchange Rate Higher as Stock Markets Fall
The pound to euro rate is being heavily dictated to by stock markets at present and current conditions favour the shared currency it seems.
- Pound half a percent lower day-on-day against the euro at 1.2806
- Risk that GBP slides down to 1.21 if current range is not broken
- Short-term momentum indicators on GBP-EUR advocating for more gains, even as these positive signals are being eroded
The pound is in decline against the euro as the single currency is aided by lower stock markets.
The net result is the quagmire in GBP/EUR continues.
"We remain trapped in a range between 1.3072 and 1.2618," says Robin Wilkins at Lloyds Bank, "the longer this range plays out the more likely it becomes that we still see a move towards key long-term channel and Fibonacci support in the 1.25-1.2195 region."
At this stage a rise through 1.3071 is needed, suggests, Wilkins, to suggest further near-term strength to test more important resistance in the 1.3245-1.3423 zone.
Euro Aided by Softer Market Conditions
The euro is likely to suffer when stock markets are rising and benefit when they are falling.
As we note here, there are signs that incredibly large sums of money are starting to flow to riskier, emerging market, assets once more. You can bet a significant chunk of these funds are cheap euros.
This dynamic is testament to the latest cut in Eurozone interest rates - it is now cheaper than ever to borrow euros to fund stock market bets across the globe.
So when markets are up, as they are at the start of the week, the euro is likely to suffer selling pressure as investors buy foreign currencies to fund these investments.
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.
Still Forecasting a Mildly Bullish GBP/EUR
While the GBP is presently under pressure against the euro, we would argue it is too early to write sterling off.
Momentum indicators are advocating for further upside with a key technical signal, the MACD, rising strongly, in line with the trend higher.
In short, the trend at the present time is higher and we would err towards favouring the British pound over coming days, with a break above 1.3100 probably confirming a move up to a target at 1.3183 and the R1 monthly pivot.
Volume is supportive of a break higher on the right shoulder.
As mentioned before, the pair has formed an inverted head and shoulders, which happenes when the exchange rate makes a low, as happened on the 11th Feb (left shoulder), recovers, makes another deeper low, as GBP/EUR did on the Feb 25 (the ‘head’), recovers and then makes another low (right shoulder), which is not lower than the head, as the pair did on March 10.
Continuation of dominant down-trend is still possible, however, if confirmed by break below head lows at 1.2605 – down to 1.2508 and the S1 Monthly Pivot.
The Week Ahead for the British Pound
It’s a busy week for the pound – especially Wednesday.
First there is employment and wage data and then a budget speech from the Chancellor.
There is a possibility unemployment and wage data could shock to the downside give the poor data recently and evident slow-down in the economy, and this would push sterling lower.
Interestingly, weakening data could have either of one or two affects.
It could weaken sterling due to fears of a recession – or it could strengthen the ‘stay’ campaign because of increasing fears a Brexit would result in more of a slow-down.
The Budget rarely has a very large impact on the pound, but this week it is likely to have a dampening effect, if anything, due to the view that the chancellor is likely to increase austerity at the expense of growth and this is seen as detrimental to the Bank of England’s accommodative monetary policy objectives.
According to Capital Economics’ Scott Bowden the two do not easy bed-fellows make:
“Remember, the Government’s fiscal mandate calls for a surplus on public sector net borrowing (PSNB) by 2019/20. The Chancellor may even increase austerity further if the OBR presents him with detrimental forecasts.
“This contrasts with the extremely loose stance on monetary policy. Indeed, with the MPC certain to keep interest rates on hold on Thursday, Bank Rate is set to have been at a record low of 0.5% for seven whole years. This doesn’t necessarily make for the ideal policy mix.”
Finally, the Bank of England has its rate meeting on Thursday March 17.
Whilst no-one really expects a rate change, it’s the minutes which will be carefully scrutinised both from a monetary policy perspective and also possibly for members’ views on Brexit.
Overwhelming concern about the fall-out from Brexit could play into the 'stay' campaigns' hands and lead to gains for the pound.
Betting agentcies are already making 'stay' a favourite, despite neck-and-neck polls, and if the impression starts to grow that the ‘in’ campaign is likely to win the referendum then this could catapult sterling higher due to the massive risk premium in the recent decline.
We see risks therefore skewed to the upside for the pound due to this Brexit premium being taken back as the campaign potentially polarises around a pro-EU win.
ECB to Prompt Euro Weakness
Draghi told us at the much-hyped March policy meeting and press conference that it was only under current conditions that the ECB would not be cutting rates any further, but if conditions changed it might.
Whatever the case, it is hard to deny the ECB announced a set of formidable measures to stimulate Eurozone economic growth while the increased supply of euros into the market will certainly weigh on the single currency over coming weeks in our view.
Meanwhile, the pound seems to have absorbed most of if Brexit risk premium now and Brexit should not bee too much of an issue unless poll results trend towards the 'out' campaign.
If anything, pound sterling seems to have found a bottom to the Brexit-inspired decline.
