Oversold British Pound to Bounce Back v Euro

Pound Sterling has endured a torrid time over recent days with the currency falling a hefty 1.55% against the Euro over the course of the past week alone.

At the time of writing one Pound buys 1.1446 Euro's on the mid-market with banks offering rates inbetween 1.1126 and 1.1045 while independent's are offering around 1.1340.

The decline in the GBP/EUR exchange rate is a function of ongoing broad-based Euro strength combined with a rerating of political risks in the United Kingdom.

When Theresa May called the June 8 General Election back in April markets assumed she would walk away with victory. At the time some analysts accused the markets of complacency - it would not be that easy.

How right they were. A poll released Thursday 25 May showed the Labour party had closed the gap on the Conservatives to 5%.

This has demanded a rapid rerating of political risks by markets who are now faced with further uncertainty.

The Pound to Euro exchange rate has now fallen to two-month lows at 1.1453 having been as high as 1.19 in early May.

Pound Looking Oversold

So where next for Sterling?

Analyst Karen Jones at Commerzbank told us ahead of the recent move lower in the Pound that the curerrency was looking ripe for a rebound.

Jones noted that the Euro's rally vulnerable to failure at around 1.1483 as this is where recent declines were arrested on the finding of strong buying.

While the Euro pushed the Pound through here on Friday, May 27 the view confirms some analysts are looking for a rebound in fortunes for the UK currency.

We also note that the GBP/EUR exchange rate is looking oversold on the near-term charts.

Studies show the Relative Strength Index (RSI) to be at 27 on the daily chart.

The RSI is a measure of momentum and it trends around the 50 level with anything above 70 showing an instrument to be overbought and anything below 30 showing it to be oversold.

The idea is that the RSI will tend to revert back towards 50 once it has moved either side of the extremes.

The last time the RSI was this overbought was back in mid-March (see circled in the above). The recovery from these oversold conditions actually saw Sterling race to multi-month highs at 1.20.

We are not forecasting such a move at this juncture however and would argue the outcome of the June 8 election will be key to any sustainable medium-term recovery in Sterling.

Longer-term, only the conclusion of decent Brexit settlement is required to boost the Sterling bulls.

Polls: As Good as it Gets for Corbyn

We have written here that some further losses for the British Pound are likely if Corbyn’s party continue with their good run.

However, our hunch is that Labour’s purple patch will come to an end as the public’s focus turns back to Brexit.

Brexit is May’s strength in that the public see her as the leader most likely to walk away with a decent deal. The upcoming negotiations will be tough and May needs the public to focus on this once again in order to regain her commanding lead.

Focus could be shifting. Reports have been made that May has told Emmanuel Macron that talks on a Brexit divorce bill should run alongside negotiations on a future trade deal.

This reminds us of the gulf that stands between Europe and the United Kingdom ahead of the talks and also confirms the view amongst those analysts that the hardest part of the entire process will be the initial opening stages.

And then there is Corybn’s foreign policy stance that sets him apart as something of a maverick in this field.

His ideas on the ‘war on terror’ and how to handle terrorism will be welcomed in some corners; but for the majority it will not be palatable.

May needs focus to fall back on Corybn following her disasterous manifesto launch, and right now this looks to be what is happening.

What the Sunday Polls say

Writing on Sunday morning I can report that the latest set of polls for the national Sunday papers confirm the shift towards Labour hinted at by Thursday's YouGov poll that sent Sterling on a tumble.

However, another YouGov poll for the Sunday Times shows the Conservative's have recovered some of that loss of ground reported in their poll from last week.

Recall the YouGov poll for the Times that showed Labour had narrowed the gap to 5% while the latest poll shows Labour have shed 2% to 36%, the Conservatives are unchanged at 43%.

Opinium report that May's lead had slipped to 10%, down from a 13% the week before and from 19% on April 19.

ComRes reports that the Conservative's lead had fallen to 12%, from 18% in a comparable poll on May 13.

ORB say May's lead had halved to 6%.

It is reported that the Conservative's election strategist Lynton Crosby has order the party to return to its main message: That only Theresa May can be trusted to negotiate Brexit.