Pound-Euro Exchange Rate Forecast to Pivot 1.1250

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- Any strength in GBP/EUR exchange rate seen as "corrective" - AFEX

- Rebounds equally look restricted much beyond 1.1450 or 1.1600

- Any gains from Bank of England meeting to be limited - Danske Bank

Technical analysis from one of the UK's oldest foreign exchange brokerages confirms any gains in the Pound-to-Euro exchange rate is likely to remain restricted over coming days and weeks.

"Following a sharp sell-off during 2016 and 2017 GBP values have re-stabilised with the market effectively pivoting 1.1250 at present," says analyst Trevor Charsley with Associated Foreign Exchange (AFEX), the London-based broker.

A pivot point is a technical analysis indicator used to determine the overall trend of the market during different time frames.

The market is considered to be displaying 'bullish' sentiment if it is trading above the pivot point, while trading below the pivot point indicates bearish sentiment.

Sterling is seen buying 1.1217 Euros at the time of writing and is therefore below the pivot point identified by Charsley. Therefore, readers should be aware that only a move above 1.1250 would be seen to represent a turn in fortunes from bearish to bullish for Sterling in the short-term.

Indeed, "broader readings imply the impulsiveness of this prior decline will eventually prompt further/meaningful erosion and intervening rallies are thus seen as corrective," adds Charsley.

We reported in our week-ahead forecast that GBP/EUR has already pierced the bottom of its long-term, sideways, range and is therefore more likely to go lower from a technical perspective, especially if the range floor is pictured as the lower border of a channel in the way shown in the chart below - which is a very plausibly interpretation.

Sterling is seen to be treading water on global foreign exchange markets with traders eyeing an important Bank of England decision, due Thursday August 02.

Markets are pricing in a rise in the UK's basic interest rate from 0.50% to 0.75%; a move that will not likely provide any support to Sterling as it is so well telegraphed. What will matter is the Bank's overall assessment of the economy and their communication on potential interest rate rises in the future.

Should the Bank strike an optimistic tone, GBP/EUR could rally, but "fresh rebounds equally look restricted much beyond 1.1450 or 1.1600 area resistance," warns Charsley.

Should the Bank strike a sombre tone, "values appear content to triangulate for now support at 1.1050 or 1.0900 should otherwise limit (near to medium term) bear risk," adds the analyst.

"The GBP has been one of the weakest performing currencies in the G10 space over the past month, as political uncertainty related to Brexit has outweighed the growing prospect of a rate hike from the Bank of England in August. We expect EUR/GBP to trade slightly lower going into the Bank of England meeting. However, given that the market almost fully discounts a rate hike, we expect any rally in the GBP to prove short-lived," says Morten Helt, a senior analyst at Dankse Bank.

Also striking a cautious tone heading into the 'Super Thursday' event that sees the Bank release its Inflation Report is foreign exchange strategist Viraj Patel with ING Bank.  

While we see the MPC delivering a 25bps rate hike at the ‘Super Thursday’ August BoE meeting, we think the potential for at least 1, if not 2, dissenters (Cunliffe and Ramsden) – as well as cautious rhetoric by Governor Carney in the post-meeting press conference – is unlikely to engender much hawkish spirit in either UK rates or the Pound this week, not least as both markets remain dominated by the risk of a no-deal Brexit," says Patel.

With sentiment towards Sterling appearing decidedly gloomy, we would not be too surprised were the BoE event to surprise on the positive side and deliver some advances in the Pound.

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