Euro-to-Pound Rate: Talk of a Reversal Gathers Steam

• Spot market quotes:
• Pound to Euro exchange rate today: 1.0860
• Euro to Pound Sterling exchange rate today: 0.9207

There is much chatter about a reversal in EUR/GBP in the analyst community.

The talk started after the pair formed a bearish reversal day on Tuesday after tipping 0.9300, and then followed through lower in a large down day on Wednesday, which took the exchange rate to a low of 0.9186.

This sort of market behavior is commensurate with market tops, although it is also a little premature, if understandable given the long rally which is now looking rather overstretched.

Forex.com's Fawad Razaqzada puts the issue concisely - from a technical perspective at least:

"EUR/GBP’s rally appears to have stalled. It formed a Doji candlestick pattern after an extended bullish run, on Tuesday. With the momentum indicator RSI also being around the ‘overbought’ threshold of 70, and the fact that price has subsequently held below the Doji candle, this is characteristic of bearish price action."

"What’s more, broken support levels such as 0.9250 and 0.9235 have turned into resistance. And while the moving averages may be in bullish order, the price has moved significantly above the 200-day average, which increases odds for a reversion to mean," adds Razaqzada.

From a fundamental perspective, the consensus appears to be that the Pound, which is undervalued anyway, is extremely undervalued above 0.9300, so it is little wonder it rotated and fell back down at that level.

ING's Chris Turner highlights how undervalued GBP is above 0.93:

"We had felt that the 0.93/94 levels were possible this quarter, but that GBP would be extremely under-valued there."

Valuation models do not take into account political factors, however, and this appears to explain why Sterling got so cheap - Brexit appears to be the unknown variable.

"The pound’s underperformance since April has been chiefly due to the political turmoil in the UK and the fact the Bank of England refused to turn hawkish despite UK inflation rising above the Bank of England’s target," says Razaqzada.

If the recent news about negotiations is anything to go by then it appears the process is not going at all well and - who knows could even get worse.

Most recently the Guardian reported that Michel Barnier, the EU’S chief Brexit negotiator, has said there has been “no decisive progress” on key issues in talks with the UK, "as the two sides hit deadlock over the divorce bill."

The UK side wants to discuss all aspects of the divorce simultaneously whilst the EU is only willing to discuss how a new trade deal would look once the exit bill has been agreed, as well as the border with Ireland and the status of EU citizens already living in the UK.

The UK appeared to be challenging the EU's adherence to their position, arguing it was unlawful to discuss aspects of the break in isolation.

However, there also appears to be evidence the UK is not making its starting position on the above issues clear, making it difficult for the negotiators to work towards a compromise.

The Pound meanwhile could continue falling back down to its October lows if Prime Minister May keeps repeating her mantra that "No deal is better than a bad deal."

Meanwhile, as far as EUR/GBP goes, we look to Commerzbank's technician Karen Jones for the 'voice of reason' in relation to whether it has topped or not.

Jones notes the tough resistance zone above 0.9300, which explains the turnaround at the highs very well:

"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."

As far as downside goes she notes how the "0.9203 two month support line," is currently being "eroded", but that this is not enough to confirm a reversal of the trend in her view.

Rather for her, it is the four-month support line at 0.8992 which is the game changer, stating, "the up move remains intact above here."

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