The Pound-to-Euro Exchange Rate in Best Performance Since July 24, Profit-Taking Cited
“EUR/GBP: profit taking, at last…” - Piet Lammens, KBC Markets.
Pound Sterling appears to have formed a temporary support base at the 1.08 level against the Euro.
Demand for Sterling appears to be abundant at this level with profit-taking on the Euro's multi-month run of strength perhaps being the key driver of price action at present. “Global market positioning also dominated Sterling trading today,” comments analyst Piet Lammens at KBC Markets in Brussels.
With news and data light, markets appear to be trading according to technical considerations i.e. buying and selling according to key levels on the charts.
As we commented in our week-ahead forecast, the downtrend remains intact but an oversold Sterling was liable to stage a recovery.
This story is playing out very nicely for us.
The Pound to Euro exchange rate staged a 0.55% rise on a day-to-day basis in the mid-week trading session having gone from 1.0745 on August 29 to 1.0850. This is the largest bounce seen since July 24.
At the time of writing on Thursday, August 31 the rate is higher still at 1.0880.
We note that the markets desire to focus on technical drivers has allowed for a reversal in Sterling owing to the currency being heavily oversold against the Euro.
Indeed, UK specific news flow remained Sterling negative: the stalemate in the Brexit negotiations persists and the UK July money supply and lending data were softer than expected.
(That said, we find European Parliament Brexit Coordinator Guy Verhofstadt’s comments out today that a transition deal is now needed as positive).
“Even so, EUR/GBP joined the correction of EUR/USD. EUR/GBP trades currently in the 0.9230 area. Remarkably, cable held up relatively well despite the overall USD rebound. This suggests some underlying GBP strength,” says Lammens.
KBC Markets assume that technical considerations are “the main driver of this move. (profit taking on the recent, protracted EUR/GBP rally).”
Analyst Karen Jones at Commerzbank says, "EUR/GBP has faltered ahead of the 2008-2017 resistance line at 0.9344. Together with the 0.9403 October 2016 high, this represents tough resistance which is likely to hold the initial test."
In GBP to EUR terms this makes for a support line at 1.07 and October 2016 low at 1.0634. Jones believes the trend of a weakening Pound and strengthening Euro remains intact.
From a more fundamental point of view, an interesting point is raised by KBC Markets who suggest the fall in value of Sterling against the Euro will worry policy-makers at the Bank of England who might be concerned about the upward pressure it might place on inflation.
As such, “a further GBP-decline would at some point bring higher inflation again on the radar of the BoE. Let’s call it some kind of self-destroying aspect of the recent GBP decline against the Euro,” says Lammens.
The Euro is likely to remain subdued over coming days as traders express caution ahead of the key European Central Bank meeting due on September 7.
“At the current level, it is difficult to chase the currency higher ahead of the ECB meeting next week and as long as speculators’ positioning remains so extended,” says a briefing from UniCredit Bank.
“So it seems likely we may be entering a period of consolidation as investors decide to take a breather, interpret the ECB’S message on 7 September and reassess,” add UniCredit.
At the same time, analysts at the Italian lender say they think Euro downside remains very limited given 1. the “weak-USD” factor and 2. that Euro appreciation is rooted in the improvement in economic dynamics in the Eurozone.
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