Technicals: GBP/EUR Exchange Rate Poised to Break Higher
- Market Quotes:
- Pound to Euro exchange rate: 1.1358
- Euro to Pound Sterling exchange rate: 0.8783
The last few months have seen a dramatic fall in the Pound to Euro exchange rate due to a combination of softening UK data and increased political uncertainty in the United Kingdom.
By contrast, Eurozone data is improving while political risks ease.
As a result of these factors GBP/EUR finds itself near the bottom of its 1.13 and 1.20 trading range, at the start of the new trading week:
Although GBP/EUR has made a half-hearted attempt to recover over the last two weeks, technical studies confirm the pair remains in a downtrend.
However despite this, given the pair is at the range floor, there is an assumption it will continue to respect the range boundaries and eventually start to move back up towards the middle of the range, and perhaps even higher.
A break above the downtrend line - as drawn in the above graph - from the April highs would signal a reversal higher.
Confirmation of such a break would come from a move above 1.1430.
The MACD is also corroborating a bullish forecast as it has formed a bottoming pattern (circled below)
In the absence of such a break higher then there is still a risk of a piercing below the range lows.
A move below 1.1260 would probably signal such a break and a move down to an initial target at 1.1000.
Pound Sterling looks to be going nowhere fast against the Euro at present; but don’t be deceived as periods of consolidation don’t tend to last for long.
The Pound to Euro exchange rate appears to be effectively caught in an intermediate range of between 1.1300 and below 1.2000 with the lower end of the range being tested over recent days.
The lull in market conditions is not specific to the Pound as foreign exchange volatility has plummeted with the Pound trading tight ranges against the likes of the Dollar and Euro.
“The summer solstice last week was marked appropriately by year-to-date lows in FX implied volatility,” says Kit Juckes at Societe Generale. “The summer doldrums have thus descended on the FX market. It is difficult to see what would stop the market being lulled into a deeper slumber in coming weeks.”
Juckes warns that the volatility decline cannot keep going on, “but it is a mug's game to speculate exactly when and why it will spike.”
When the spell breaks, will the Pound shoot higher or lower against the Euro?
Analyst Lucy Lillicrap at Associated Foreign Exchange says we are more likely than not to see the Pound head lower.
“The impulsive or trend-like nature of recent erosion suggests re-emergent strength as/when seen should now prove corrective and a negative resolution is thus increasingly likely in coming weeks,” says Lillicrap in a briefing released on June 26.
Lillicrap is a technical analyst who studies the structure of the market via charts for clues as to future direction.
“If 1.1250 area support gives way enough compression already exists to enable a subsequent extension beneath 1.1000 as well and in the meantime only above 1.1550/60 resistance will meaningfully postpone this awaited Sterling sell-off,” says Lillicrap.
Politics Central for Pound this Week
On the agenda for Sterling this week:
- Ongoing debate around of Brexit negotiations
- The Government’s alliance with the DUP to allow it to govern
- The debate on the Queen’s Speech, with a vote expected on Thursday
- The government is also expected to present details of proposals on rights for EU citizens after Brexit on Monday.
One of the main events for Sterling in the week ahead is the voting of parliament on the Queen’s speech, which is to be held on Thursday 29.
The event should pass by without little hitch though owing to the successful signing of a pact between the DUP and Conservative parties.
In exchange for a number of key policy pledges and spending, the DUP will support the Government's agenda in Parliament.
This will allow May to Govern effectively and removes a key piece of uncertainty in the UK political sphere. .
The only other events of any note is Bank of England Governor Mark Carney's appearances on Tuesday at 11.00 BST and Wednesday 14.30 at the ECB's central banker's forum.
Markets will be looking for any hints that he supports raising interest rates in the UK, as does the Bank's Chief Economist Andy Haldane.
The Pound dropped last week when Carney said he would not support a rate rise only to rally the following day when Haldane said he would support such a move.
If those looking to raise rates win the argument, we would see another pillar underneath Sterling fall in place.
Data and Events for the Euro
The main release for the Euro will be June inflation data at 10.00 BST on Friday, June 30.
Current estimates have Core CPI rising a basis point to 1.0% from June 2016 and Headline CPI slowing slightly to 1.2%, from 1.4% in 2016.
Canadian investment bank TD Securities expect core inflation to stay at 0.9% and headline inflation to fall even more steeply to 1.1%.
Inflation is important for the Euro via the impact it has on the policy choices made at the ECB. Higher inflation could prompt higher interest rates at the ECB while falling inflation would see the status-quo maintained.
Higher interest rates tend to be positive for the Euro as they would likely attract capital to the Eurozone as investors seek out increased yield. It would also slow the shipping of cheap Euros to other countries in order to fund investments.
Much of the fall in headline inflation is likely due the recent decline in oil prices.
“The decline comes from fading base effects on energy prices, where the contribution to the headline rate is falling from 0.9ppts in February to only 0.1-0.2ppts now,” said TD.
Another key event for the Euro will be Mario Draghi’s speech at 14.30 on Wednesday.
