Buy Euro Weakness Against Pound Sterling say Tech Analysts

• Pound to Euro exchange rate: 1 GBP = 1.1173, See live data.
• Euro to Pound Sterling exchange rate: 0.8949, See live data.

“A corrective phase stays in place, but we stay bullish for 0.9050.” - David Sneddon, Credit Suisse.

The British Pound is holding its ground on global currency markets, but the extent of this consolidation is likely to be short-term in nature. Nevertheless, it still provides an opportunity and some breathing space for those with impending Euro payments to make.

This week we have seen the Pound to Euro exchange rate rally from lows towards 1.11 back above 1.12 giving a ~100 pip jump.

But this recovery is small if we consider Sterling was buying as much as €1.14 last week and much more work must be done before we can consider the downtrend to be over.

Piet Lammens, an analyst with KBC Markets in Brussels says he thinks a break above 1.1468 in GBP/EUR would suggest that downside momentum is easing further.

But, the analyst is wary of betting on the Pound at this stage.

"For now, we don’t see a trigger for a sustained rebound of Sterling against the Euro. We still look to buy EUR/GBP on more pronounced dips. For that to happen, EUR/GBP probably needs some help from a correction in EUR/USD," says Lammens.

According to David Sneddon at Credit Suisse, the exchange rate is “still in a consolidation phase” rather than in a recovery phase which should be instructive to readers wondering where the two currencies are headed next.

Sneddon notes the recent behind the Euro has fallen and is now week and, “we must allow for the setback to extend further.”

In a research piece on the EUR/GBP exchange rate, dated July 26, Sneddon does however confirm that his overall stance is one that favours further Euro strength and therefore advances in Sterling are likely to be limited in nature.

“We still view weakness as corrective once it has run its course look for an extension above 0.8983/97 to open up further strength to 0.9028 next, with the November 2016 high at 0.9050 expected to try and cap at first,” says the analyst.

A direct break higher could even target 0.9142/68.

Sneddon is a technical analyst and he seeks to understand the structure and intent of the market by utilising charts to understand the next levels.

Analysis is usually conducted using the EUR/GBP exchange rate, but for those looking to convert their Sterling, GBP/EUR is typically more applicable.

Looking at the above-mentioned targets from a GBP/EUR angle then, Sneddon says a break below 1.1132/1.1115 will open up further declines to 1.1077 next. 1.1048 could support the exchange rate against further declines.

A break of this could however see the exchange rate slump to 1.0939.

So these are two important targets those with an interest in the market should be keeping an eye on.

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Euro Weakness Could be With us Longer

The thrust of Sneddon’s analysis is that the Euro is likely to ultimately extend higher.

The question however, is how long can the current relief for Sterling last, and how high could it potentially go?

Analyst Robin Wilkin at Lloyds Bank believes the Euro is overbought against the Pound and must atone for its recent exuberance.

“The sideways 'flag' type action in the last day or so, suggests there is room for a deeper correction in the cross,” says Wilkin in a briefing dated July 26.

“Momentum studies are still unwinding from overbought supporting this bias, with 0.8905-0.8870 important trend support below,” says Wilkin.

Wilkin would ideally look for this area to hold if this cross is going to extend the trend from the April lows towards 0.9175/85 resistance.

A decline through 0.8815 is needed to suggest a more significant top has developed at ~0.9000.

Turning this around for those watching the pair from the Pound to Euro perspective, Wilkin is suggesting an upside bias might be in place over coming days as the Euro unwinds from overbought conditions.

The 1.1230-1.1274 region is seen as key trend resistance that is likely to test Sterling’s strength. Note at the time of writing the exchange rate is at 1.1220 which hints that maybe this level has yielded and the door to further gains is now open.

However, a break above 1.1344 is needed to suggest a bottom has been put in place and that Sterling has a shot at redemption.

So pencil this level in.

Also studying this market is Karen Jones, a technical strategist with Commerzbank who is a little more bullish on the Euro's prospects against Sterling, but like Wilkins and Sneddon reckons a period of consolidation is likely.

"The 13 count on the daily chart suggests we will see some near term weakness," says Jones, "we would not be at all surprised to see a small retracement ahead of any further strength towards 0.9059," says Jones.

This equates to 1.1038 in GBP to EUR terms - this represents the low-point reached by GBP/EUR back in October 2016.

Recall Sneddon is also looking for a first initial target on a resumption of weakness at 1.1048, so the 1.1038/48 region is obviously a key level to watch should selling pressure resume once more.

Pound to Euro Exchange Rate Fundamentals: Has Brexit Transition Period Been Dashed?

A big topic we have been following of late with regards to Sterling is the issue of a transitional period in which Britain takes baby steps into a post-Brexit world.

This would see the UK essentailly remain a member of the single market and customs union in order to provide a cushion for businesses against any potential shock.

It also allows business to plan accordingly and make long-term investment decisions.

The EU will almost certainly only allow such an agreement were the free movement of its citizens between the UK and EU be allowed to continue unhindered.

However, a report out on Thursday, July 12 suggests the UK government will not allow this.

A new immigration system will be in place by March 2019 when the free movement of people between the EU and the UK ends, a minister has said.

Immigration Minister Brandon Lewis was speaking as the government commissioned a "detailed assessment" of the costs and benefits of EU migrants.

The report is due to be completed in September 2018 - six months before the UK's scheduled date for leaving the EU.

However, we note Sterling's reaction to the headline "UK-EU freedom of movement 'to end in March 2019" has been muted.

It could be because the government has today announced that it has commissioned a report into EU migration and this could well mean free movement won't be restricted.