Stronger Pound Sterling Rate Against the Euro in Q3 Likely

• Pound to Euro exchange rate today: 1 GBP = 1.1396 EUR, week's best exchange rate: 1.1419, low: 1.1352
• Euro to Pound Sterling exchange rate today: 1 EUR = 0.8774 GBP, week's best exchange rate: 0.8809, low: 0.8756

Analysts at DBS - the multinational banking and financial services probivider - believe the Euro’s strong performance in the second-quarter of 2017 is not a trick that will be easily repeated in the third-quarter.

The view, if correct, could benefit those hoping for a stronger Pound to Euro exchange rate after weeks  of weakness.

In the face of renewed Euro strength, the Pound has fallen from highs towards 1.20 against the Euro at the start of the second-quarter, to languish at a floor between 1.13 and 1.14 at the start of the third-quarter.

For now it would appear the floor is holding suggesting a spring-board for a potential recovery is forming.

The Euro has meanwhile risen from lows around 1.06 against the Dollar to record highs in the 1.1450 region over the same period.

The Euro was the best-performing G10 currency in the first-half of 2017 suggests our comparitive data.

Overdone

The Euro's rally, while still expected to extend on a longer-term basis, is looking a little old and extended in shorter-term timeframes.

Market data suggest positive sentiment towards the Euro reached an extreme with 93% of traders bullish on Thursday June 29, before settling down to 82% at the start of the new month.

The last time the index reached this high was in February 2013, causing the European Central Bank (ECB) to intervene verbally. Over the following two months the Euro fell by 6.4% against the Dollar.

According to IMM data, the EUR’s rise in 2Q17 was attributed to speculators aggressively dumping their bearish EUR bets.

Sentiment to the currency improved after Eurozone break-up fears evaporated after national elections in major European countries rejected far-right populism, especially after the first round of the French presidential elections on 23 April.

The Euro got its skates on when ECB President Mario Draghi surprised everyone with his view that deflationary forces have been replaced by reflationary ones at the ECB Forum on Central Banking in Sintra, Portugal.

Misread

But Philip Wee, an analyst with DBS in Singapore, says markets have misinterpreted these comments, where Draghi said Eurozone growth was above-trend and broadening geographically.

Looking ahead, the Euro needs compelling drivers to continue with its period of outperformance.

It would appear on this front, disappointment is likely.

“Speculators needed a compelling reason to build long EUR positions to extend the currency’s appreciation,” says Wee. “There is a risk that some of the bullish EUR bets put on in late June may need to be returned.”

Wee notes the ECB is since clarified that Draghi’s stance has been misinterpreted.

Historical trends also offer some compelling clues as to how the Euro might act over coming weeks.

“Since its launch in 1999, the EUR was either flat or weaker in the immediate quarter after appreciating more than 6% in the previous three months,” says Wee.

While a repeat of this kind of move is highly unlikely given the current state of the Eurozone economy, it does hint at how the Euro can respond following a period of outperformance.

“Euro upside may fizzle when market volatility picks up, partly because much of the enthusiasm for the single currency has been built on a positive story, and our more negative themes for the quarter don’t dovetail with that,” says John Hardy at Saxo Bank.

Saxo Bank say they believe volatility will pick up in the third-quarter after being benign of late. “At present, the “Goldilocks combination” of weakening inflation and a softer USD reigns, but this will weaken as central banks retreat from their hyper-accommodative stance,” says Hardy.

An Up-Month

The view that the next couple of months could be supportive of the Pound against the Euro is a theme we have covered of late from a technical angle.

Pound Sterling Live’s Joaquin Monfort argues that technical signs are bullish for GBP/EUR and he suggests the pair may start to move back up towards the 1.2000 range highs.

The last two down-months representing May and June - occurring as they did within an up-move from the October 2016 lows - were probably corrective in nature and Monfort says this suggests “July will be an up-month”.

Research has proven that when two down-months happen together within an up-move or trend, they normally represent a correction of the main trend, which reverses in the next month.

The set-up accurately predicts that the next month will be bullish to a 66% degree of probability.

So we could see the potential for better exchange rates ahead for those hoping for a stronger Pound to Euro exchange rate.

Analysts at UniCredit S.p.A have meanwhile said they think there could be space for about a 4% appreciation in Sterling over coming weeks if markets continue to buy into the theme that the Bank of England might raise interest rates in 2017.

At present markets ascribe a 50/50 chance of such an outcome; it is certaintly a theme to keep abreast of.

However, we would suggest those watching this market don't wait too long as there is broad consensus that the Euro is at the beginning of a cyclical uptrend against the Dollar.

If true, Sterling-Euro could well struggle to deliver any material gains.