Charles Stanley: GBP/EUR Rate Could Reach 1.10

After two consecutive weeks of losses for the Pound to Euro exchange rate, which has seen it fall from highs of 1.1906 to lows of 1.1378, the pair now looks at risk of further downside to the 1.10 lows, according to institutional analysis seen by Pound Sterling Live.

The pair’s failure to break clearly above the 1.19-1.20 bar and its subsequent retreat have increased the chances of a more extensive decline to key support at 1.10.

“It is often the case,” says Bill McNamara at brokerage Charles Stanley, “that failures at resistance are then followed by tests of support and, if that is the case here, we could see sterling drifting back towards €1.10 or so before this move lower is complete.”

The fall is 1.10 is a substantial decline from the current 1.1440 level the exchange rate is trading at, at the time of writing.

What could cause such a decline?

The answer may be in a combination of improving Eurozone fundamentals and deteriorating UK fundamentals.

Two events stand out in the week ahead as candidates for propelling the Euro higher.

The first is the alleviation of some political risk after the Netherlands election on March 15.

Previously this had been a cause for concern as it showed the anti-EU PVV party out ahead with by far the most votes, however, the part has seen its share fall dramatically in recent weeks so that it will now be in the with a fight for first place with the current centrist ruling party.

Even if PVV win the most votes, unless they get over 50% (at the last poll PVV got only 22%) they will have to form a coalition government, which they cannot do because none of the other major parties want to govern with them.

It seems highly unlikely Holland will be exiting the EU following Wednesday’s election as some had feared.

Assuming PVV fail to get elected, some of the risk premium which has been pressuring the Euro to the downside will come off, leading to a recovery for the currency.

The second event is Eurozone inflation data, which is forecast to show a 1.8% rise in February, which is arguably at the ECB’s stated target of at or just below 2.0%.

Whilst Core inflation remains too low to expect the ECB to stop their stimulus policies – stimulus which keeps the Euro weak – a rise in headline inflation will put pressure on them to begin unwinding those programmes earlier than expected, which will also elevate the Euro.

This is especially true after last Thursday’s ECB rate meeting where the governing council adopted a much less accommodative stance and removed or altered key phrases from their guidance.

Pound Potentially Weighed Down by BOE Meeting

The bloodless spring budget stands in contrast to the high stimulus policies being adopted across the pond and should be a warning to Sterling traders – especially those trading cable.

However, sterling may struggle across the board as the knock-on effects of the budget’s continued austerity impact on monetary policy too.

As stated by advisory service Capital Economics, in a note following the budget, the Chancellors lack of generosity in opening the coffers and increasing public spending has in effect left the Bank of England (BOE) with more of the work to do to help support growth.

“Fiscal policy is still set to provide a significant drag on GDP growth over the next few years – very similar to that planned in the Autumn Statement.

As such, the onus will remain on monetary policy to support the economy,” said Capital’s Jonathan Loynes.

If the OBR’s forecast of slowing growth towards the end of the 2010s is accurate then the BOE will be forced to keep interest rates lows for some time yet.

This stagnating policy position will not help Sterling against other currencies and will lead to further weakness.

The first signs of this more dovish approach – dovish means wanting to keep interest rates low - may come about in the minutes of this Thursday’s BOE rate meeting.

Such a sign would immediately pressure the Pound lower, towards the 1.10 level highlighted by McNamara.