A Bounceback in Sterling? Tech Forecasts Show GBP/EUR Exchange Rate at Risk of "a Corrective Phase" Higher

Something new to ponder for those watching what seems a relentless decline in the GBP/EUR exchange rate.

While the Euro has dominated against Sterling over recent months, there is the suggestion that this strength is at risk.

“The rally phase for EUR/GBP has been quite resilient over the past several months, but we sense a corrective phase is close,” says a technical note from analysts at J.P. Morgan. "The rally from the April low is still viewed as counter-trend."

Technical analysis is based on the study of charts which offer important insisghts into market structure and psychology. These studies differ from those made by fundamental analysts who focus on the influence of the economy, politics etc. Often the studies can complement each other, while often the technical and fundamental views can be completely opposed. 

So this is another arrow in the quiver for those looking for market guidance.

Recall that back in October the Pound crashed down to 1.08 against the Euro as it reached its post-Brexit referendum nadir? The currency has since then tested 1.20 on two occassions, the latest test being back in April.

Note this analysis from the investment bank covers a medium- to longer-term timeframe and it would appear the market is in quite an important technical area with Sterling-Euro said to be testing critical support in the 1.0935/1.0776 region.

This support level includes the 76.4% retracement of the climb from the 2016 low (reached in October 2016) amid an oversold and bullishly diverging momentum setup.

Any resistance to a recovery starts at the 1.1099/1.1123 area which represents the August breakdown and 38.2% retracement of the decline from the July high.

J.P. Morgan suggest a break of this resistance should confirm a deeper recovery and a closer test of the 1.1315/1.1436 zone (July high).

Breaks of this area will help define whether a medium-term bullish shift is underway argue analysts.

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The theme is being echoed elsewhere in the analyst community.

“The recent rise of EUR/GBP has gone quite far and the pair is moving into overbought territory. So, we look for a correction, for whatever reason,” says Piet Lammens at KBC Markets in Brussels.

While the market is currently being technically driven, Lammens does say he is looking for  a correction in EUR/GBP to possibly come off the back of a correction in the headline EUR/USD. He is also looking for some decent UK economic data and improving global risk sentiment to help a Sterling correction.

However weakness in the Euro is unlikely to last long and KBC Markets “maintain a buy EUR/GBP on dips approach as we expect the constellation of relative euro strength and sterling softness to continue.”

The 0.9415 flash-crash spike is the next medium-term target on the charts. This is a target of 1.0621.

So a note here - while both analysts are eyeing the potential for a recovery in the Pound, KBC Markets would appear to be more on the bearish spectrum and eye a deeper correction.

“GBP/EUR has moved to the lowest levels since October 2009, even more concerning for GBP sellers is the support levels now resting at 1.0625 leaving a lot of space to the downside,” says Jonathan Pryor who sits on the corporate FX dealing desk at Investec’s London office.

However, a break to ~1.06 is not imminent we believe owing to upcoming calendar risks.

Eyes are already turning to the upcoming Economic Symposium to be held in Jackson Hole, Wyoming where European Central Bank President Draghi is set to speak.

So while the Pound to Euro exchange rate has been toying with fresh eight-month lows of late but we reckon traders will be too nervous to increase exposure to the Euro until after Draghi’s address.

“The ECB's Draghi may well be careful in what he says to not cause too much EUR volatility; it is worth noting that EUR has risen as much as 6.5%, as measured by the Bloomberg Euro index, since his speech in Portugal in late June. It is widely expected that Draghi's comments will outshine Yellen's at the end of the week,” says Pryor.