Buying Pound Sterling Weakness Against the Euro is Paying off
- Look for further clarity on Brexit, could aid Sterling this week
- GBP/EUR might have staged a false break lower last week
- Pound-to-Euro exchange rate quoted at 1.1296 at time of writing
The grounds for a sustainable GBP/EUR recovery will be laid if Theresa May can deliver a unified Government position on Brexit later this week. Image by Jay Allen © Crown Copyright
Foreign exchange strategists at Danske Bank view the recent jump in the value of the Euro relative to the British Pound as likely to be unsustainable, insisting that any weakness in Sterling should be bought in anticipation of a rebound.
Indeed, the strategy call to buy Sterling weakness against the Euro appears to be paying off with the GBP/EUR exchange rate staging a 0.30% bounce back to 1.1325 at the time of writing.
The Pound fell below 1.1261 at one point last week amidst a bout of Euro appreciation that followed an announcement of an EU-wide migration deal that was seen as taking the pressure off Angela Merkel's fragile coalition government.
But, Vladimir Miklashevsky, Senior Economist and Strategist with Danske Bank in Helsinki says from a risk/reward perspective, "the break above 0.8850 in EUR/GBP is a selling opportunity."
From a GBP/EUR perspective therefore, any break below 1.13 is a buying opportunity.
The trade is one that assumes the recent longer-term sideways trend in the exchange rate is likely to last, and that any moves out of the broad 1.13-1.15 range are ultimately false breaks that will correct.
"The break-up through 0.8840/50 interim range resistance is already starting to run out of steam. A move back through 0.8830/20 would signal the move last week was a false break and take prices back into the previous range," says Robin Wilkin, a strategist with Lloyds Bank. (Recall 0.8850 translates into 1.13 GBP/EUR and 0.8830 into 1.1325.
Above: The EUR/GBP graph shows how reliable the range trade has become.
"While over we cannot rule out a move towards channel resistance in the 0.8920 region, but this is low confidence after Friday’s reversal. We believe a return to the previous range is more likely," adds Wilkin. (0.8920 EUR/GBP = 1.1210 GBP/EUR).
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The range is ultimately a reflection of both the EUR and GBP suffering offsetting bouts of political uncertainty, with the countervailing forces ultimately reflecting in a rangebound GBP/EUR. That the exchange rate is towards the bottom of its range suggests Sterling is now suffering the lion's share of political uncertainty.
But, the confidence to buy Sterling on weakness extends beyond technical considerations for Danske Bank who are of the opinion Sterling will ultimately move higher as Brexit uncertainty fades.
And this week is an important one from that regard.
"The UK governments discussions around its white paper is likely to attract more attention when Theresa May’s cabinet most likely meets next week to try to come to an agreement," says Miklashevsky.
An 'away day' for the government's top decision making body, the cabinet, is to be held on Friday, July 6. The 'away day' is to be held at the Prime Minister's official Chequers residence and an official White Paper covering unanswered questions should result from the meeting.
Key questions to answer pertain to the Irish border and the shape of the future customs agreement.
It could well be the case that should cabinet unity break out the Pound pops higher as expectations for a more rapid progress to a final Brexit deal becomes evident.
Downing Street has meanwhile produced a third model for handling customs after the UK leaves the EU, the BBC understands.
Details of the new plan have not been revealed publicly but senior ministers will discuss it at Chequers.
While the economy continues to trundle along in a broadly GBP-supportive fashion, anxiety over Brexit remains heightened. But even here, the contrarian who bets with the Pound could do well over the course of July we are told.
"The Pound is unlikely to respond to positive macro developments until there is clarity on Brexit. Here is where pessimism has clearly increased of late, adding increasing downside pressure on the Pound," says Derek Halpenny, an analyst with MUFG. "But July will at least bring the possibility of some increased clarity."
"We can’t recall a period when the sentiment and news flow has been so consistently negative," says Halpenny who is European Head of Global Markets Research at MUFG.
When sentiment is extreme, as could be argued of the negative sentiment towards Sterling right now, the prospect for a rebalancing grows.
"Our sense here is that a lot of bad news is now in the price," adds Halpenny who has considered a number of factors which could play in favour of a Sterling rebound over coming days and weeks.
"With pessimism so high currently, the Pound could easily get a lift from the prospect of the UK government providing details on its negotiation stance and how it plans to resolve the Irish border issue," says Halpenny.
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