GBP/EUR Exchange Rate to Struggle Beyond 1.17, US Dollar Surges into Overbought Territory
- Written by: Gary Howes
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The British Pound failed has failed to advance beyond a key resistance line against the Euro while the Dollar remains the dominant force in global FX but there are growing concerns over the currency now being overbought.
- GBP to EUR exchange rate: 1.1672
- GBP to USD exchange rate: 1.2349
Pound Sterling was the fourth-best performing G10 currency behind the Canadian, US and New Zealand Dollars for the week ending November 18.
The Euro was the week's second-worst performer in G10.
However, if we look at currency performance since the US election the softest currencies since the election are the
Australian dollar, the Japanese yen and the New Zealand dollar, while the most resilient relative to USD is Pound Sterling.
For GBP/EUR watchers the trend remains positive, however we have seen the pair struggle to hold a close above 1.17.
There appears to be little bid support for the Pound above this level as the GBP/EUR pair has been banging its head against this ceiling for a couple of days now:
Failures in GBP/EUR at 1.17 appear to be instructing moves in other Sterling pairs at this stage.
At the time of writing the spot rate has fallen back to 1.1672 which leaves those making international payments with the option of doing so from a rate that will range between 1.1275 and 1.1577 depending on how competitive your foreign exchange transfer provider is.
Our analyst Joaquin Monfort meanwhile writes ahead of the new week Sterling is likely to remain well supported against the Euro:
"We expect a continuation higher, with a break above the 1.1734 high first targeting 1.1800, then 1.1900 and then 1.2000.
There is now quite a lot of support underpinning price action, including the 1.1645 key lower high and the monthly pivot (PP) at 1.1585."
GBP/EUR
Daily Chart Showing live Inter-Bank Rate and Indicative Rates for International Payments.
US Dollar Strong - but Could now be Overbought
US Dollar strength has been ubiquitous into the close of the week ending November 18 as “the incessant rise which has dominated the post-election period continues apace”, says Joshua Mahony at IG in London. “In a high growth environment, it is likely we will see investors moving into the US as a source of capital appreciation.”
It’s not just a gut feeling that suggests the Dollar is overvalued - some astute studies by UniCredit Bank’s Dr. Vasileios Gkionakis gives us some clear evidence of a currency that is running ahead of itself.
Gkionakis has observed that the US Dollar index tends to track the movement in the difference between US two year bond yields and those of bond yields of major economies.
A divergence has opened up, and the implication is that the Dollar must come down:
“At this stage, it is very difficult to foresee where the tide will turn given the unprecedented amount of noise. Fundamentally, however, we would like to reiterate our view that the USD is considerably overvalued at current levels,” says Gkionakis.
This overvaluation is something to keep in mind when approaching the GBP/USD and EUR/USD in the coming week.
The EUR/USD is looking particularly oversold and ripe for a big relief rally.
"While we believe that the medium-term trend is for USD firmness, we have expressed a degree of caution during the Trump-rally. The daily RSI suggests that the DXY looks increasingly overbought, says Richard Kelly, Head of Global Strategy at TD Securities.
Moreover, Kelly notes the US Dollar index (DXY) looks to be in the early stages of a shooting star; a close below 101 should confirm this and would suggest a bearish turn.
The Pound’s Week Ahead
The main event will be the Chancellor’s Autumn Statement on Wednesday, November 23.
Markets will be focused on the amount of fiscal stimulus the government is willing to spend, which if substantially higher is likely to support the pound as it will take the pressure off the Bank of England to print money and use that as stimulus instead.
Talk of stimulus may have been hyped as an admission of ‘outright loosening’ now seems unlikely, according to Capital Economics’ Paul Hollingsworth.
“All eyes are now on the Chancellor, who delivers his first fiscal set piece with the Autumn Statement on Wednesday.
“He will be constrained somewhat by recent poor borrowing numbers (see Chart below) and a disappointing set of economic forecasts.
“Accordingly, we expect fiscal policy to be less tight than the current plans, rather than providing an outright loosening.”
The Dollar's Week Ahead
This week will be dominated by continuing speculation about potential key appointments to Donald Trump’s new administration.
Other than that, Existing Home Sales are out at 15.00 (GMT) on Tuesday, November 22, and are expected to show a reduction to 5.42 million from 5.47m.
Wednesday, November 23 sees the release of Durable Goods Orders at 13.30, with Core Orders forecast to rise 0.2% mom in October from 0.1% in the previous month.
“October’s durable goods report (Wednesday) is likely to reveal a big surge in orders, albeit mostly due to a spike in the notoriously volatile commercial aircraft component,” said Capital Economics’ Paul Ashworth.
New Home Sales are released on the same day and are expected to show a rise of 590k in October, from 593k previously.
Crude Oil Inventories, out at 15.30 could also influence the dollar on Wednesday, although many traders may have already taken money off the table before the Thanksgiving Holiday on Thursday.
