Pound Sterling Unlikely to Test 1.20 Against the Euro for Some Time

• British Pound to Euro exchange rate: 1.1649, day's high: 1.1666, low: 1.1635
• Euro to Pound Sterling exchange rate: 0.8585, day's high: 0.8594, low: 0.8571

Pound Sterling enjoyed a fillip on Thursday, May 18 on the back of some unexpectedly strong retail sales data, but we believe it is too soon to expect the recent highs to be tested again.

The theme of recent weeks has been one of Euro strength as markets start to contemplate a future of interest rate rises and the ending of the money-printing programme at the European Central Bank.

Amidst this rerating, the single currency has pushed aside most competitors and at the time of writing it is the best-performing currency in the G10.

As such, despite the pick-up in the Pound to Euro exchange rate seen on Thursday we would caution against calling the end of the Pound's decline and those who are holding out for a return to 1.20 should not get their hopes up just yet.

In short, we need to see signs that Sterling is entering a short-term uptrend again and follow-through price action ahead of the weekend is looking unhelpful.

Our technical studies suggest while the longer-term uptrend remains valid while prospect of the recent pullback extending remains possible in the shorter-term.

Technical analysis is the study of price charts and patterns in price, volume and positioning data.

It arguably provides a more objective tool for forecasting and analysing asset prices including foreign exchange rates than trying to call fundamental events such as political decision-making and economic data releases.

Despite the recent boost from Retail Sales the mini-downtrend has still not reversed.

We see an immediate target at 1.1500 which forms the lower boundary of the multi-month consolidation.

We would expect buying interest to pick-up around here as has been seen in the past.

Whilst we are now much more ‘cautiously bearish’ we still see the possibility of a move down to the bottom of the range at 1.1500.

But a break below the 1.1600 would be required for confirmation of more downside first.

From a technical perspective, the MACD has just broken down below the zero-line in a bearish continuation.

MACD measures momentum and when it corroborates the direction of the price action, as in this case, it supports a continuation of that trend.

Commerzbank’s Karen Jones, in a discussion of the inverse of GBP/EUR, the EUR/GBP pair, sees more upside, which in GBP/EUR translates to more downside, much as our analysis suggests.

AFEX’s Lucy Lillicrap sees the possibility of a breakout in either direction with considerable volatility eventually, with the 1.1500 key lows as a significant watershed.

“As with GBP/USD (and indeed EUR/USD) the current range here can still break in one of two ways going forward with sufficient compression evident to trigger a sizeable relocation regardless,” remarks the AFEX analyst in a note to clients.

“An extension below 1.1550 secondary support looks necessary to encourage an intermediate negative view - targeting 1.1250 thereafter."

Meanwhile, analyst Robin Wilkin at Lloyds Bank tells his commercial banking clients that he ultimately favours the Euro going forward.

“After holding important resistance in the 0.8600-0.8610 region, sharp pullbacks from there have subsequently held key short-term support in the 0.8530-0.8500 region. While over, we can expect further choppy price action, but ultimately we are biased for a move through resistance to continue the move from the range lows towards the range highs in the 0.8700-0.8900 region,” says Wilkin.

Breaking the numbers down from EUR/GBP into GBP/EUR, we have the following:

0.8600-0.8610: 1.1628-1.1614
0.8530-0.8500: 1.1723-1.1765
0.8700-0.8900: 1.1494-1.1236

>> Update: Best international payment rate on GBP / EUR now seen at 1.1549, your bank is likely to be offering a rate in the region of 1.2346 to 1.1328. More details here.

Bank of America Backing Sterling to Falter

The Pound has been a middle-of-the-road performer over the course of the past month with little by way of Brexit news to ruffle its feathers.

The relative stability on the political front and decent data releases has allowed it to break to a  fresh 8-month high against the Dollar which has allowed it to remain supported against a number of other smaller currencies.

The apparently done-and-dusted conclusion of the UK general election that sees markets pricing in a hefty Conservative Party win means that there is little by way of domestic politics to bother the currency either.

But, how long can this hiatus last?

Not long argue analysts at Bank of America Merrill Lynch Global Research who have this week told their clients that they see Sterling undergoing big moves over coming months.

“We like trading Brexit in FX because it is a theme that is not correlated with any other theme. We also believe that GBP can see moves well beyond what other G10 FX currencies can see in the months ahead-as indeed has been the case since the Brexit referendum. Getting the Brexit short-term and long-term market implications right could offer some of the best opportunities in G10 FX this and next year,” say BofAML in a note to clients dated May 18.

BofAML argue that the consensus amongst foreign exchange tradershas become too positive on Brexit.

“We have been optimistic that the UK and the EU will agree to a Brexit transition and eventually to a reasonable new trade arrangement. However, getting there is not going to be smooth and the negotiations are likely to have a very difficult and slow start, in our view,” say analysts.

It seems to BofAML that the market has already priced a positive scenario and could be disappointed in the months ahead, when the Brexit negotiations actually start.

The implications for the British Pound are notable.

“GBP will end the year lower, in our view, as Brexit negotiations will have a very difficult start. We remain optimistic for the final outcome and will buy the GBP dip, but we do see a dip ahead. We also see high risks of the negotiations temporarily collapsing at some point, triggering market turmoil until the two sides go back to the negotiating table,” say BofAML.

Note that this is by no means an isolated view with other noted analysts arguing a similar picture will play out - one where the Pound dips and then rises in subsequent months.

For instance, Intesa Sanpaolo say the Pound will dip in the one- to three-month timeframe before making a more concerted attempt at recovery.

Bank of America are forecasting the Pound to Dollar exchange rate at 1.25 by mid-2017 ahead of a recovery to 1.27 by the end of the year and a gradual rise to 1.32 by the end of 2018.

However, the profile for the GBP/EUR looks a little different with the expectations for a stronger Euro over coming months capping any notable recovery potentia.

The Pound to Euro exchange rate is forecast at 1.1905 by mid-year ahead of 1.1765 by the end of 2017 and 1.1495 by the end of 2018.