Pound-to-Euro Exchange Rate Dances the "Side-ways Chop" but Sterling Might Just Have the Edge say Forex.com

- GBP/EUR exchange rate seen compressing around 1.14

- But "the Pound has a slight edge over the Euro" on a fundamental basis

- Technicals hint at further losses by the Euro

© Andrey Popov, Adobe Stock

The GBP/EUR exchange rate has endured a significant compression in range over recent days, with the pair looking increasingly unwilling to move away from a pivot loosely associated with the 1.14 level.

If we look at the chart, the two trend lines I have drawn confirm the squeezing of the exchange rate - this apparent stagnation in the market surely cannot continue, and often when a break-out happens it can be akin to the release of a coiled spring.

The question is, in which direction will this market pop?

"When you pair two weak currencies against each other, what do you get? Side-ways chop.  That’s exactly what has happened to the EUR/GBP for the past several months as data from both the Eurozone and the UK have been far from impressive," says Fawad Razaqzada, Market Analyst with Forex.com, the retail financial trading brokerage.

Thus far in the first half of 2018, macroeconomic pointers from the Eurozone have been poor with German data being particularly disappointing and even the latest set of survey data has disappointed, suggesting to markets the soft-patch might be something more embedded than a weather induced slowdown.

Questions are now being asked as to whether the European Central Bank has the stomach to start weaning the Eurozone off the easy money it has been supplying over recent years; market assumptions that an announcement on the matter would be made in July were key to the Euro's strong performance in 2017.

Meanwhile, Sterling has been unable to capitalise on the Euro's economic disappointments as the UK has also endured a soft growth patch, summed up by an anaemic 0.1% first-quarter GDP print.

However the most recent set of retail sales numbers comfortably beat expectations leading some economists to suggest the data heralds the start of a renaissance in UK economic growth. "GBP is a big outperfomer in the G10 space," says Mark McCormick, North American Head of FX Strategy with TD Securities following the release of the retail sales numbers, "the UK retail sales print helps lift Sterling's near-term fortunes."

The Bank of England itself expects the UK economy to see improved growth rates over coming months, eyeing the soft start to the year as being temporary in nature.

Looking at the GBP/EUR quagmire, Forex.com's Razaqzada is inclined to favour Sterling upside against the Euro as a potential resolution; "despite the overall weakness in UK data recently, the BoE is still more likely to hike rates before the ECB ends QE."

Foreign exchange markets bid the Euro higher through the course of 2017 eyeing strong data that suggested to them that the ECB would exit its money-printing quantitative easing programme by September 2018, ahead of an interest rate rise in mid-2019.

Markets are meanwhile more-or-less expecting a second interest rate rise in the current cycle from the Bank of England to be delivered by the time the year is out.

"This makes us fundamentally bearish on the EUR/GBP," says Razaqzada, citing the inverse of GBP/EUR. "On balance, due to the above fundamental reasons, the Pound has a slight edge over the Euro."

Technicals Also Favour Sterling Over Euro

Razaqzada has studied the charts of the EUR/GBP, and finds that the market is pointing to further losses for the Euro against its cross-channel counterpart.

"The EUR/GBP, which topped out around 0.9300 last August, has been putting in a series of lower lows and lower highs," notes the analyst. "As a result, a bearish trend line has been established, while the slope of the 50- and crucially 200-day moving averages have turned negative, thus objectively telling us that despite the choppiness the trend is indeed bearish for the Chunnel."

Consequently, Forex.com will be looking for lower price levels going forward, with the next key supports coming in at around the round handles of 0.8700, 0.8600 and 0.8500.

"We would maintain our slightly bearish bias on this market so long as it makes technical sense. In this case, a break above the trend line and most recent high of 0.8840 would probably invalidate the bearish view," says the analyst.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.