Interesting Developments that Have us Turning More Positive on the Pound's Outlook Against the Euro

Don't look now, but the British pound to euro exchange rate (GBP/EUR) may have turned a corner with the Bank of England’s March policy meeting minutes playing a big part.

The pound sterling’s efforts against the euro have hardly been inspiring of late; yet in what has been a quiet market over the past two weeks, some interesting developments have occurred.

For those waiting for a better exchange rate to conduct payments in euros, the good news is that these developments are in your favour.

These developments are technical in nature, so the good news is I will spare you the Brexit talk!

The technicalities underlying the trade in the pound and euro are reflected via the exchange rate’s daily chart; what the chart tells us is where buying and selling interest is to be found, what trends are valid, what trends are weak, where weakness is likely to emerge, minimums, maximums etc etc.

The 'bottom line' is the charts do reflect real-life monetary decisions that, importantly, hint at what might happen next.

So, first up, the chart:

The exchange rate has been reliably suppressed by selling interest for months now, with a predictable pattern of more aggressive selling emerging after a period of GBP strength.

I have drawn a downward-sloping line at these peaks to help visualise these patterns of failure in GBP.

An interesting occurrence has happened this March though - the pound appears to have tentatively broken out of this pattern.

Importantly, the last bout of weakness appears to have ended HIGHER than the previous low brought on by the February weakness. A higher low - does this represent a start of an uptrend? Often such a pattern does advocate for further advances, particularly if the next peak in GBP/EUR is higher than the early March peak.

I have drawn a new line between these two troughs to signify that the moves from here could be higher.

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.

 

Bank of England Spurs GBP Recovery

Of course developments in the technical structure of the market incorporate developments in the fundamental framework.

The recent bounce was sparked by the Bank of England who told us this week that while the EU referendum will likely see them maintain interest rates at current record-low levels through much of 2016, the next move in rates will most likely be higher.

The pound has bounced against the euro and is now at 1.28 having traded in the 1.26’s ahead of the Bank of England.

The outlook for GBP/EUR is more positive ahead of the new week as it was only a few days ago that had us talking of an impending failure in the market which could see the pair rush back to the early 1.20s.

The market had staged a decline back towards the bottom of the current 1.3071 to 1.2618 range, before seeing a sharp reversal following the FOMC event on Wednesday night.

“The range clearly remains intact, with our intra-day studies retaining a bullish bias for the coming sessions, suggesting a move back to the range highs can be seen,” says Robin Wilkins at Lloyds Bank.

Wilkins sees 1.2730/06 is intra-day support that would support weakness for the move higher.

However, looking at the medium-term, we must remember the longer-term trend lower still remains a valid concern and Lloyds warned earlier this week that there was a heightened probability that a break to 1.21 could happen.

Probabilities of such a break have diminished following recent price action.

Wilkins believes eventually the exchange rate risks an eventual move lower to key long-term channel and Fibonacci support in the 1.25-1.2195 region.

Only a break above 1.3245/1.3422 would suggest those levels in the early 1.20’s won’t be reached and that a significant low is already in place for a move back towards the 1.3698-1.4285 region.

50 Day Moving Average Stands in the Way

While Wilkins sees the top of the range at 1.30 being possible we note with trepidation that standing in the way of this target is the 50 day moving average, signified by the grey line in the above image. The pound has not moved above this barrier since October 2015; why should this change now?

We are reluctant to suggest a break is possible based on sterling's recent form.

Analyst Karen Jones at Commerzbank says she is standing back from a negative bias towards sterling-euro to allow for an extension of the recovery action.

However, Jones is also watching the moving average believes sterling will utlimately capitulate until a break occurs.

Jones is however watching the 55 day moving average, more or less located at 1.300.

“We will assume at this point that the market has downside potential,” says Jones who does however acknowledge that there remains formidable support in the form of the 200 week moving average at 1.2602.

Should this support zone break a target at 1.2450 / 1.2422 is engaged.