Nomura: GBP/EUR Rate Can eke out Further Gains

• Pound to Euro exchange rate today (17-11-16): 1.1723
• Euro to Pound Sterling exchange rate today: 0.8531

Pound Sterling breaks above 1.17 against the Euro for the first time since mid-September on Friday November 18th, and more gains are possible we are told.

Sterling has extended its recent recovery rally against the Euro ahead of the weekend as the Euro struggles across the board.

However, generalised strenght in Sterling is another feature of the markets with gains being seen against a host of major currencies

And, analysts at Nomura are also backing Sterling to extend its recent recovery.

"GBP’s pain trade dynamic looks set to become a self-fulfilling position reduction," says a note from Nomura referencing the short-covering taking place in the market.

Short-covering is where a trend turns and forces market participants to close their trade, thereby supporting the currency further. Because market participants are forced out as their stop-losses are trigggered it is called a 'pain trade' by Nomura.

"Over the next few sessions what matters from these levels is how much the position reduction/reflation trade continues. For some time now GBP has expressed EM currency characteristics, with higher yields leading to a weaker currency. However, this correlation has reverted back towards that of a reserve currency in the short term, which combined with the market’s pain trade in GBP could further express a position-reduction dynamic," say Nomuar.

Due to this being more about position reduction than hopes that the UK might get a better deal, Nomura still expect GBP to approach the Hard-Brexit equilibrium levels in the medium term.

"But for now this pain trade cycle could see GBP/USD at 1.30 and EUR/GBP at 0.84 unless the politics give the market another wake-up call," say analaysts.

EUR/GBP at 0.84 is GBP/EUR at 1.19.

Those with foreign exchange payments have watched the value of GBP steadily grow since November 3 when a bounce off the floor at 1.1070 occured.

From a spot rate of 1.1719 international payments can now be conducted at rates ranging between 1.1309 and 1.1614 - depending on how competitive your provider is on passing on rates.

Bulk of Sterling's Declines Have now Passed

Nomura is not the only Japanese financial behemoth expecting a stronger Pound going forward.

The outlook for Sterling is brigher argue strategists at Bank of Tokyo Mitsubishi (MUFG) who view the sharp falls witnessed in October were misplaced.

MUFG's Lee Hardman, writing from London, says in his view the bulk of Sterling's declines are now behind it:

"The latest IMM report revealed the short pound positioning amongst asset managers and leveraged funds was still close to record highs heading into the election. It has resulted in the trade-weighted pound reversing the sharp decline recorded during October which included the flash crash on the 7th October.

"The price action supports our view that pound weakness during October was mainly sentiment driven which became excessively bearish towards the pound driven by hard-Brexit fears, and was not fully justified by the UK’s fundamentals.

"We continue to believe that the bulk of the adjustment lower for the Pound is now complete.

Hardman does caution against expecting a leap higher in Sterling however.

Rather the currency strategist anticipates a period of consolidation at lower levels as opposed to a sustained rally or another sharp adjustment lower as GBP already lost around a fifth of its value over the last year and a half.

Multi-Week Best, but Momentum Fading

The British Pound appears to have finally broken the heavy resistance at 1.1670 - it had previously failed to do so on the three attempts made over the past week.

Upside momentum has faded of late, understandably so as the GBP/EUR was left looking overbought at tje start of the week.

Consolidation was required.

The GBP/EUR exchange rate is however building support above 1.16 where it has hovered since Friday suggesting downside could be limited by buying interest at this level.

“We have the impression that the recent Sterling comeback is losing some momentum,” says Austin Hughes at KBC Markets in Dublin. “A sustained break below the recent highs against the Euro or the Dollar doesn’t look that evident.

For Hughes the decline of EUR/USD is a prime weight on EUR/GBP.

The woes of the EUR/USD are therefore probably allowing Sterling to remain in favour in the short-term.

However, “we are not convinced on the sustainability of the GBP rebound. However, for now, we stay side-lined as long as the decline of EUR/USD weighs on EUR/GBP,” says Hughes.

The EUR/USD exchange rate has had a torrid time of late having been in decline for nine successive days.

Talk of the Euro hitting parity against the US Dollar is becoming an increasingly popular theme.

If these forecasts do come true then the prospect of further strength against the Euro over the medium- to long-term becomes possible.