Pound-to-Euro Exchange Rate Stabilises on Talk of EU Brexit Concessions

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- Talk of looming concession by EU to UK in Brexit negotiations

- RSI in oversold zone

- Slightest of good news could spark strong recovery

- GBP/EUR exchange up on the day as base at 1.11 solidifies

Pound Sterling has edged higher against the Euro ahead of the weekend with the GBP/EUR looking to form a base at the 1.11 that could well stabilise the under-fire exchange rate in the short-term.

Part of the resilience comes on the back of a news reports detailing the potential for a concession being put on the table by the EU to UK in the ongoing round of Brexit negotiations.

The Times reports that European leaders are preparing to negotiate a deal that would let Britain remain in the single market for goods while opting out of free movement of people.

Member states have let it be known that they could abandon one of the bloc’s ideological red lines in return for more Brexit concessions from Theresa May. They expect her to replicate all new EU environmental, social and customs rules in addition to those set out in the Chequers white paper.

The potential trade-off is on the table to be discussed at a special meeting of all 28 leaders in Salzburg next month. The Times say this marks the first significant divergence between the public position stated by Michel Barnier, the EU’s chief Brexit negotiator, and the European Council.

"What fueled the GBP bounce? Talk that the EU could make a concession. Under consideration is to allow UK to remain in common market for goods. In exchange EU may demand UK replicate all environmental, social & customs rules. UK parliament may find it still too much to swallow," says Marc Chandler, a prominent financial market analyst and Wall Street Veteran.

We are seeing a decent bounce in Sterling-Euro at the time of writing in line with the developments with one pound buying 1.1128 euros on the interbank markets; the low for the day and week is pencilled down at 1.1074.

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Oversold Conditions Unwinding

Sterling has over the course of the past 24 hours touched its lowest in nearly a year against both the Dollar and the Euro, thanks to a rapid repricing of a 'no deal' Brexit scenario by currency markets.

"The Pound’s slide has gathered momentum this week as traders have grown increasingly concerned that Britain might leave the European Union without an agreement on a future relationship, an event which is expected to hurt the economy by raising trade barriers with the continent," says Swaha Pattanaik on the currency desk at at Thomson Reuters.

But, Pattanaik cautions that the sell-off could now be overdone, adding that "Sterling looks ripe for a short, sharp bounce."

"The Pound is at its lowest in nearly a year against the dollar and the euro, and options prices show extreme pessimism about its outlook. Investors have grown too gloomy too soon about the risk of a messy Brexit. Even a glimmer of hope of a better outcome will spark a snapback," says Pattanaik .

There are other signs that the Pound could be due for some respite:

The Relative Strength Index on the daily charts of the Pound-to-Euro exchange rate is reading at 28 - the index tends to hover around 50, with 70 representing overbought conditions and 30 representing oversold conditions.

Therefore, technically speaking, the Pound is oversold against the Euro.

If we look at the below chart, the RSI hardly ever spends time below 30 (The RSI is the bottom pane). The last time it did so was back in September 2017 and the move back above 30 on the RSI corresponded with the start of a notable positive trend that saw the GBP/EUR exchange rate rally from 1.08 up to 1.14.

Whether this kind of rally occurs in August 2018 is however unlikely owing to the uncertainty.

Analyst Martin Miller with Thomson Reuters says the Euro is now "severely" overbought against the Pound and has ventured "well above the confines" of the 30-day bollinger bands and the market looks "overbought."

Nevertheless. We would suspect some relief might be on offer.

Furthermore, the British Pound is currently attempting to defend a key support area at 1.11. Failure here could open the door to a sharp impulsive move lower but a successful defence of 1.11 could lead to a rebound.

"EUR/GBP has reached the 0.9014/34 October and November 2017 highs where it may short-term stall, however," says Karen Jones, a technical analyst with Commerzbank in London.

This gives us that support at 1.11/1.1070 in Pound-to-Euro terms that we have mentioned.

The range, between 1.11 at the bottom and 1.15 at the top - was the level markets were happy to maintain Sterling-Euro at while Brexit negotiations were thrashed out by EU-UK leaders.

But, the level was ultimately contingent on some form of amicable deal being sealed by Brexit day in March 2019.

That the 1.11 bottom appears to be threatened suggests markets are losing faith that such a deal is indeed possible.

The fear for those looking for a strong Pound is that the break below 1.11 and out of the long-held range could effectively open the door to a more rapid descent.

Jones warns that should the Euro's run higher not stall, "a swift rise towards the August 2017 high at 0.9308 may soon ensue."

i.e. a "swift fall" in GBP/EUR to the August 2017 low at 1.0740 would take place.

But, could an oversold RSI and successful defence of this significant support level conspire to support Sterling.

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