"Staircasing Lower" - Tech Studies say Weakness in GBP/EUR Exchange Rate Not Yet Over

Pound Sterling v Euro

  • Quotes:
  • Pound to Euro exchange rate today: 1 GBP = 1.1181 EUR
  • Euro to Pound Sterling exchange rate today: 1 EUR = 0.8943 GBP

Pound Sterling's long-term trend against the Euro remains down according to a leading foreign exchange technical analyst who we have been following for some time now.

And based on the direction of travel taken by the GBP/EUR exchange rate since June 2016, there is little reason to doubt the forecasting abilities of Lucy Lillicrap at Associated Foreign Exchange.

Lillicrap issues weekly forecasts for the Pound v Euro exchange rate and has been able to identify periods of strength in Sterling as being temporary in nature as opposed to the beginning of a more sustained recovery.

So while some were prematurely calling the end of the downturn, Lillicrap was warning that the exchange rate was still pointed lower.

“Attempts to reverse ongoing Sterling weakness here have not proven conspicuously successful in recent weeks and while the angle of descent is still relatively shallow prices nonetheless look to be “stair-casing” their way back towards 1.1000 again,” says Lillicrap in a note released at the head of the new month.

The Pound to Euro exchange rate tested fresh eight-month lows back in late June and has since recovered back towards the 1.12 level.

The recovery is unimpressive if we consider back in May the pair was as high as 1.20.

Pound Sterling to Euro exchange rate weekly chart

Above: The weekly chart of GBP/EUR points to the exchange rate approaching a key support zone - will it hold or will the broader trend lower extend?

These periods of relief tend to inevitably run into trouble and selling interest might once again reassert itself before long so those with payments into Euros should be wary of waiting too long.

“For now at least some buying interest is visible starting around 1.1150 but fresh rebounds also face selling pressure at 1.1250 then 1.1350 areas. A break of tertiary/distant 1.1450 supply looks necessary as well to reduce broad downside pressure and otherwise the 1.0940 (October 2016) low is ultimately vulnerable as well,” says Lillicrap.

However, Bill McNamara at London-based brokerage Charles Stanley sees the market a little differently and argues Sterling might in fact be establishing a floor against the Euro.

“The latest price action for this pair gives the impression that the Pound might be close to finding some sort of floor and, as the weekly chart illustrates, this coincides with a test of last year’s closing lows, at around 1.11,” says McNamara.

That said, McNamara’s conviction on the prospect of a base forming in GBP/EUR appears questionable as he does acknowledge that, "the situation remains in flux and a reversion to the October 2016 low, at 1.094, still appears to be a realistic expectation."

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UK Economy Forecast to Bounce Back by NIESR - Why we Believe this is Good for the Pound

A new set of economic forecasts has been released by the NIESR (National Institute of Economic and Social Research) which shows the UK economy should see a material uptick over coming months.

If the NIESR are right then McNamara's suggestion that a base in GBP/EUR might be forming could be on the money. Why? Because the Bank of England could well rise interest rates if the economy does in fact see 1.9% growth in 2018, as forecast by the NIESR.

In fact, the organisation reckon 2017 growth will be at 1.7% which implies increasing growth in each coming quarter.

NIESR growth forecasts

“It is a gentle increase over the next few quarters,” said Amit Kara, Niesr’s Head of UK macroeconomics research at NIESR.

This should prompt the Bank of England into action. Kara says the Bank of England “should withdraw some of that stimulus in six or eight months’ time, if the economy evolves as we forecast, which is with further strengthening in growth".

Market pricing for such an outcome is low which suggests that the market will have to price in such an eventually if growth continues to accelerate; such pricing implies higher UK gilt yields and of course a stronger Pound.

UK Manufacturing Data Signals Strong Pick-up in Activity

Latest data out of the UK economy confirms the manufacturing sector continues to see expansion as demand for UK exports expands.

IHS Markit and the CIPS reported at the start of the new month that their Manufacturing PMI survey reveals an acceleration in activity in the sector with a reading of 55.1 being reported for July, up on the previous month’s 54.2 and ahead of economist forecasts for 54.4.

The headline PMI was boosted by stronger inflows of new work, higher levels of production, improved job creation, longer supplier delivery times and a slight increase in inventory holdings.

However, the same optimism is not being reflected in the construction sector as the July construction PMI confirmed a slowdown with a reading of 51.9 suggesting the sector is just about growing.

Markets had forecast a reading of 54.5.

This represents the weakest construction performance since August 2016 as commercial work fell the fastest in 12 months. New orders were seen declining with job creating also falling.

"Commercial building activity slowed for the first time in five months and was the main drag on the Index. Housing, the shining light of the sector eased marginally, but produced the slowest growth since April, as parallels with the darker days of Brexit, worries about the UK economy and post-election uncertainty can be seen across the construction sector," says Duncan Brock, Director of Customer Relations at the Chartered Institute of Procurement and Supply.

 

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