British Pound Eyes Flash-Crash Lows vs Euro as Relentless Sell-Off Gathers Steam
"EUR/GBP kept chewing through offers and printing fresh highs – we do have clear air technically now until the next big level at 0.9400/10 which is an 8 year double top."
Another day, another fresh eight-month low for the Pound to Euro exchange rate.
The British Pound is finding very little technical support available against the Euro at present and studies confirm the market is structured in such a way that very little buying interest in the currency is likely until the flash-crash lows of October 2016 are encountered.
Sterling's fall through key support levels verifies the stance taken in our week-ahead forecast.
Our Joaquin Monfort wrote at the weekend:
"Our studies note the rate to have reached a new low of 1.0925 on Friday August 18, and whilst the downtrend may have lost impetus over the last two weeks it remains dominant and intact.
"We therefore expect it continue, with a break below the lows probably reaching a target at 1.0911 initially, where the S2 monthly pivot level is situated."
This target has been met but we will watch the rate over coming hours to ascertain as to whether the move holds and the pivot has in fact been overcome. We could of course be witnessing an ongoing test of support and the Euro might yet be rejected.
A break well below the pivot, "for example, if the exchange rate were to fall below 1.0880, could well denote that the pivot had been overcome and the exchange rate was continuing lower," says Monfort.
He suggests such a break would probably move rapidly lower again, to a further target at 1.0800.
But there is a sense a deeper move is underway and this market is trending strongly and it will take a more substantial support to arrest the move lower.
The problem for the Pound is that there is a bit of clear air until the next major support levels which are located at the multi-year October flash-crash lows.
"EURGBP kept chewing through offers and printing fresh highs – we do have clear air technically now until the next big level at 0.9400/10 which is an 8 year double top. The trend remains your friend - dips should continue to be bought in the pair - 0.9110/15 is trend line support in EURGBP with 0.8990/10 below," says Zhi Yang Tham, a technical strategist at J.P. Morgan.
So that "next big level" is at ~1.0640 if you are looking at this from GBP/EUR.
This equates to the flash-crash level reached in October 2016 and markets are expecting some degree of support to be found here (note different exchanges quote different levels for the actual low so putting an exact pin on this level is not possible):
David Sneddon, a technical analyst with Credit Suisse is also looking at the the 2016 flash-crash lows as an obvious target.
Sneddon has analysed the pair from the EUR/GBP angle:
“EUR/GBP remains on the front foot and has extended its rally to break above price resistance and the 78.6% retracement of the October/December 2016 fall at 0.9142/68.
“We look for follow through above here to keep the trend directly higher for trend channel resistance at 0.9243 next, ahead of 0.9302/11. Our core target remains at the 2016 and October 2009 spike highs and the measured objective from the large base at 0.9400/14.”
0.94 in EUR/GBP gives us 1.06 in GBP/EUR. Getting the picture?
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Support must Surely Come?
Analysts at Nordea Bank this morning tell us they are not expecting the Pound / Euro rate to fall to 1.00 as is the case with other analysts. Why? The Pound is heavily oversold and fundamentals don’t justify the moves.
Indeed, Nordea reflect “a complete meltdown of UK key figures is already priced into EUR/GBP,” and this is an unreasonable stance.
Watch European Central Bank Mario Draghi’s speech at Jackson Hole, Wyoming for a potential Euro arrester.
To be honest though, we don’t have much faith in Sterling staging a substantial recovery until a game-changer occurs on domestic soil.
EURGBP in rocket formation pic.twitter.com/xHKSFu7pNs
— Neil Wilson (@neilwilson_etx) August 23, 2017
$EURGBP is sneaking up toward its "GBP flash crash" high near .9270 - could serve as a magnet for prices here pic.twitter.com/PF6SlUNQlJ
— Matt Weller CFA, CMT (@MWellerFX) August 23, 2017
“We see some similarities between the Pound and the US Dollar currently, with both currencies languishing as a result of political uncertainty outweighing positive signs in terms of the outlook for economic growth,” says Derek Halpenny, European Head of Global Markets Research at MUFG.
Nevertheless, Halfpenny also gets the sense relief can't be too far off:
"We are not convinced that the Pound will remain under downward pressure ahead of a fresh round of Brexit negotiations and the return of parliament after the summer recess.
"Although the Pound is down 3% in August, the second-worst performing G10 currency (only NZD worse), we would not be surprised to see that performance turn around given the continued favourable flow of economic data."
