GBP/EUR Exchange Rate Forming a Base, Potential for Short-Term Recovery Eyed

• Quotes:
• Pound to Euro exchange rate (15-6-17): 1.1382
• Euro to Pound Sterling exchange rate: 0.8786

The GBP to EUR conversion isn’t exactly screaming to go lower than its new-found 1.13-1.14 range.

This is the main finding of our latest technical assessment of the exchange rate as we move through the mid-week session.

The main problem for bears is the double layer (black and blue lines) of support in the 1.1280s composed of the bottom of a long-term range and the S2 monthly pivot, a line traders use to trade counter to the dominant trend, which in this case is down:

These two levels are acting as a rally call to bulls to try to push the pair back up and this heavy buying will make it difficult for the exchange rate to break lower.

Another sign the down-move may be exhausted is it’s clear 5-wave Elliot Wave structure.

Elliot Wave theory says that the market moves in discrete 5-wave patterns up and down (it’s more complicated than that but we can’t go into it here), which suggests the move down from the April 18 highs could be a completed downcycle.

The MACD momentum indicator also looks like it is bottoming.

The last few days have witnessed a bounce, and yet despite this, the bounce has not been strong enough to convince us that it is the start of something bigger.

Ultimately, despite misgivings about the downtrend’s sustainability we must stick with our bearish forecast as there is insufficient evidence to the contrary.

A break below the double layer of support in the 1.1280’s signalled by a break below 1.1260 would provide the confirmation for a continuation to 1.1200 and then 1.1100 round-number support.

Sharing the view that Sterling might be forming a short-term bottom are strategists at Westpac Bank in Sydney.

Westpac wrote to clients at the start of the week saying they are looking to sell EUR/GBP at 0.8810 with a stop placed at 0.8870, they are targeting a fall to 0.8665.

Note that the stop moves should the trade reach a 1% gain.

Looking at this from a Pound into Euro perspective, this would be a sell on GBP/EUR at 1.1351, with a stop-loss set at 1.1274 and a target at 1.1541.

These levels are all quite within recent ranges so this appears to be a call set on a short duration.

Justifications for the trade can be explored here.

Bank of England in Focus

Near-term risks to Sterling will be posed by the Bank of England who deliver their latest policy meeting on Thursday, June 15.

Our latest analysis of how the Bank will impact Sterling direction over coming months shows the risks are skewed lower with one analyst saying they expect the central bank to cut interest rates in 2018.

No move on rates is expected at the June meeting, but minutes to the meeting should give us a hint of where the Bank is leaning.

Key for Sterling will be political developments - the nature of the demand-and-supply deal between the Conservative Party and the DUP and the trend in the Government's Brexit stance.

Right now this is a developing story that those with an interest in Sterling should follow closely.

Any suggestion the Government will become more inclusive in their Brexit planning could be positive for Sterling if it suggests a softer Brexit. However, as noted by Deutsche Bank's George Saravelos, even this is not likely to help Sterling.

For Saravelos, what matters is the Brexit process - i.e how messy it is. The analyst suggests the Government's weak position leaves the process looking messy and will therefore likely weigh on the currency.

Upcoming Events for the Euro

Probably the most important release for the Euro is inflation data out at 10.00 BST on Friday, which is forecast to show core CPI remaining at 0.9%, headline at 1.4% and monthly CPI falling by -0.1% in May