British Pound on the Offensive vs. the Euro: Targets to Eye

The Pound-to-Euro exchange rate hit a new three-week best following the news the European Central Bank is in no rush to raise interest rates. Analysts suggest further gains are likely.

It's all about the Euro side of the Euro-vs-Pound exchange rate at present with eyes on the European Central Bank which cuts its asset purchase programme by €30BN at their October policy meeting, with the cut becoming effective in January.

The Bank will continue buying bonds at this pace until at least September 2018.

There was nothing surprising in the announcement for markets which had been bidding up the Euro over recent months in anticipation of this decision; perhaps the best explanation to adopt on the whole affair is that markets adopted a "buy the rumour, sell the fact" to the well signposted event.

The Euro did take a tumble against the majority of major currencies as the ECB indicated it is still in no rush to raise interest rates and could ultimately continue its asset purchase programme for a prolonged period.

What was new was the suggestion by ECB President Draghi that the ECB would not be actively reducing its balance sheet for years, consciously setting up a contrast with the US Federal Reserve which is now actively engaging in a balance sheet reduction. 

Further, the ECB said they would keep interest rates at current levels well past the end of the asset purchase programme and for currencies the question of when interest rates will rise matters.

“That means the first rate hike would not be until October 2018. Nothing else mattered after Draghi made it clear that rates won't be increased anytime soon,” says Kathy Lien at BK Asset Management. “The market completely ignored his positive comments on growth, the small increase in wages and their view that core inflation will rise gradually in the medium term.”

Euro to Weaken Further Against the Pound

Of importance to the EUR/GBP story will be moves in the EUR/USD - often when EUR/USD is moving higher, the EUR/GBP is also seen moving higher amidst broad-based Euro strength, and the recent setback in EUR/USD could therefore help the Pound.

The EUR/USD has fallen to its lowest levels since July, having reached 1.1612 following the ECB announcement with analysts suggesting a top at 1.2092 reached in September might be as good as it gets for EUR bulls.

“Brexit and the overall performance of the Euro in the aftermath of the ECB decision might be the drivers for Sterling trading,” says Piet Lammens, an analyst with KBC Markets. “EUR/USD dropping below a first support might keep the single currency in the defensive short-term. This might weigh on EUR/GBP.”

The view of Euro being on the back-foot is shared elsewhere.

The Euro is to “remain on the defensive” against the British Pound says technical analyst Karen Jones at Commerzbank whose latest studies of the exchange rate sees the Pound making further advances over the next one to three weeks.

Jones believes the Pound should keep the Euro on the back-foot now that it has defended the October low at 1.1069 and is looking for the GBP/EUR exchange rate to challenge the next level of resistance that matters which is seen at the October high at 1.1292.

If a break of this level is successful, the Pound could move further over coming days and look to make a move on a major band of resistance in the 1.1357/1.1437 region which should cap any recovery for the time being.

Above: The target levels Jones is eyeing.

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