GBP/EUR Rate: “Grinding Trend Higher Intact”

Pound Sterling has edged off recent two-month highs against the Euro ahead of the weekend being quoted at 1.1834 at the time of writing.

The week’s best rate was seen at 1.1901 on Wednesday, February 24.

The trend since January 15 has been higher, and analysts at Lloyds Bank’s Commercial Banking division reckon this trend should remain intact for the time being.

The cross continues to hold below 1.1869/1.1905 resistance and while this holds Lloyds see the risk of a shift back to test support in the 1.1813-1.1744 region.

While above there the current “grinding trend” higher is intact for a re-test of highlighted resistance argues analyst Robin Wilkin at Lloyds.

Below 1.1744 will increase short-term pressure and suggest a move back towards 1.1627-1.16 as part of an inner range.

Medium-term Lloyds still see the market trapped for now between 1.2121 and 1.1236.

Sentiment towards Sterling Improves

We can meanwhile report that Pound Sterling no longer appears to be the pariah of the global currency community it once was.

Having taken a drubbing since late 2015, the Pound has stabilised since reaching lows at 1.1286 against the Euro on January 15 2017.

The steady sideways action mentioned above is initself indicative of a potential bottoming.

However, for analysts at Lloyds Banking Commercial Banking there is another more instructive market that sheds light on sentiment towards Sterling.

The risk that markets are attaching to Sterling has fallen sharply and Lloyds have written to clients expressing “intrigue at the dynamics of the GBPUSD risk reversals in recent weeks.”

The bank notes that the 1-month, 3-month, 6-month and 1-year structures - which effectively represent the cost of GBP/USD calls relative to their equivalent puts, and are widely used as gauges of sentiment - have all rallied in favour of calls since mid-January.

“These moves have occurred in an environment that, to us, seems more conducive to the exact opposite,” says analyst Robin Wilkin who says he believes investors are starting to shift opinion on the Pound, for the better.

That said, it remains far too early to suggest the sentiment will equate to a recovery and with a busy political calendar ahead of us the GBP should stick to familiar ranges.

But, Pound Should Still hit Parity Against the Euro say UBS

Highlighting just how uncertain the outlook for the UK currency remains is a sobering call from analysts at UBS.

The Swiss bank belive the Pound will fall to parity against the Euro in 2017 as UK economic data releases soften. Investment intentions remain weak and a number of recent indicators have also come in weaker than expected (e.g. construction, services PMIs and retail sales for January) in what may be first indications that the economy is softening.

"We expect EUR/GBP to rise to parity by end-2017 and remain at these levels by end-2018. The reversal of the UK's current account deficit closer to historical norms will require a substantial adjustment in the currency, consistent with EUR/GBP at parity," says a note from UBS dated February 24.

UBS acknowledge the adjustment may take longer than they initially thought as markets may require evidence of Brexit- and Current-Account-related growth damage, while political risk in the Eurozone also needs to clear.

"In our view these conditions will likely be satisfied already by the second half of the year," warn UBS.