Euro Breaking Down Against the British Pound, How Low Can it Go?

- Technicals hint that the tide might be turning in favour of Pound Sterling

- For the Euro, "the path of least resistance is now to the downside"

- But other analysts warn that the exchange rate is inclined to potentially go the opposite way

Image © Pavel Ignatov, Adobe Stock

The British Pound has staged a decent recovery against the Euro over the course of this past week, thanks in part to a slew of better-than-forecast economic data, culminating with a consensus-beating services PMI release mid-week.

However, the move cannot thank data alone, foreign exchange analysts studying the technical structure of the market tell us that the recovery was likely, having studied the charts.

Sterling appears to be successfully defending a key line of defence against the Euro, and one forecaster tells us the doors are therefore being opened to fresh multi-month highs.

Fawad Razaqzada, who analyses currencies for brokers Forex.com, says the GBP/EUR exchange rate could in fact now be on a move back to 1.1730, based on his technical studies of the market.

Sterling is in the process of retracing losses suffered in the prior week with the Pound-to-Euro exchange rate now trading at 1.1346, ensuring that it is above the key 1.13 level once again.

We have been focussing on 1.13 over recent days owing to its credentials as a key pivot point: last week Sterling cut through the key 1.13 support level - which has long-proven to be a solid level of support for the exchange rate from where we would have expected a rebound.

That the Pound had fallen through the floor hinted that this market might be ready to make a big directional shift lower towards 2018 lows at 1.1152.

In fact that week's low at 1.1248 is also a three-and-a-half-month low.

What a difference a couple of days make though: From touching three-month lows we are hearing the Pound could in fact be en route to multi-month highs with those strategists who opted to buy Sterling weakness now sitting on decent trading profits.

Euro Breaking Down Against the British Pound

From a technical point of view, the GBP/EUR has been stuck inside a very ugly range for several months now, "but within this range it has had occasional technically-friendly moves," says Razaqzada.

One such move occurred back in March when an attempt to break above the previous double top low around 1.1233/1.1210 support failed.

"That failed breakout attempt preceded a "nice move" higher which eventually topped out at 1.16.

"Interestingly, a very similar pattern may be unfolding again as highlighted on the chart of the Chunnel," says Razaqzada:

The technical analyst has approached this exchange rate from the EUR/GBP angle, as is typical in the analyst community, therefore we simply just have to flip the chart over, and flip the numbers over to get the GBP/EUR perspective.

What is the EUR/GBP Chart Telling us?

Razaqzada says "if the previous occasion is anything to go by then we could see a similar breakdown in the EUR/GBP going forward."

He notes the move may already be in motion as price has broken below the previous double-top high of 0.8825/40 which – if conditions were still bullish – should have held as support.

The double-top high of 0.8825/40 in EUR/GBP gives us a double-bottom low of 1.1333/1.1312 in GBP/EUR.

The target offered in the chart is important as it suggests a decline in EUR/GBP down to 0.8525 is on the cards, which gives us an upside target of 1.17 in GBP/EUR to aim for:

"As things stand, therefore, the path of least resistance is now to the downside and will remain that way unless and until the EUR/GBP goes back above that 0.825/40 area again," says Razaqzada.

"It should be noted that failed breakout attempts are quite common in trend-less markets and identifying such patterns could sometimes offer nice tradable opportunities. The markets don’t necessarily have to be trending in order to look for trades. It all comes down to knowing what to look for, when to look for it and under what market conditions," says Razaqzada.

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Not Everyone is Buying this View Though

While the Euro might be breaking lower against the British Pound once more, others are not buying the view that Sterling is turning the tide in its favour.

In fact, many remain wary of a surge in the Euro against Sterling shaping up.

"Still wary that EURGBP is on the verge of an upside break-out given its exit from a period of very low volatility. PM May looks set to face down the Brexiteers later this week, but may be no closer to a Brexit deal with the EU. 0.8900 remains the risk," says Chris Turner, an analyst with ING Bank N.V. in London.

EUR/GBP at 0.89 corresponds in a GBP/EUR target at 1.1236.

Much angst appears to hinge on the upcoming make-or-break moment on Brexit that will see the Prime Minister Theresa May come to a final decision on what the UK's position regarding the future trading relationship between the UK and EU should look like.

The UK must come up with a position on Brexit as time is running out to strike a deal with the EU; but guaranteed, that position will not please everyone on her party.

"Sterling failed to capitalise on news that the government has prepared a new plan for handling customs after Brexit; an issue that has been a thorn in negotiations so far. The proposal will be presented to UK ministers on Friday, and is expected to be followed by a White Paper outlining the UK’s preferred path," says Andreas Georgiou, Investment Analysts at XM.com.

Judging by the subdued market reaction so far though, investors do not anticipate this to be the “smoking gun” that breaks the deadlock in the negotiations.

"With the political crisis in Germany now resolved, but Brexit uncertainties still riding high, the risks surrounding Euro/Sterling may be tilted to the upside over the coming days," says Georgiou.

However, as we note here, should May succeed and get her own way, even if it means Cabinet resignations, the British Pound could well respond positively, and the Sterling bulls will win this debate on the GBP/EUR's outlook.

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