The Pound's 'Barnier Bounce' Against the Euro Could Reach 1.13 and even 1.16

Image © Andrey Popov, Adobe Stock

- British Pound benefits after Barnier says Brexit deal likely in 6-8 weeks

- Initial Pound-Euro Rate target just north of 1.13 say Commerzbank

- But GBP/EUR could take in 1.16s say Société Générale

Pound Sterling is seen holding recent gains made against the Euro in mid-week trade, with 1 GBP achieving 1.1231 EUR on the inter-bank markets at the time of writing. 

This marks a notable improvement for Sterling sellers who saw inter-bank rates as low as 1.0991 in late August, and analysts are forecasting the potential for further short-term advances amidst an ongoing shift in sentiment regarding the state of ongoing Brexit Withdrawal Agreement negotiations.

Forecasts being pencilled in by one prominent technical analyst we follow suggest the GBP/EUR exchange rate could be on course to break the 1.13 level over coming days, while another is optimistic that coming weeks might even see levels towards 1.16 being taken in.

According to strategist Karen Jones with Commerzbank in London, the GBP/EUR exchange rate chart is one to watch as it has gone sharply higher from recent lows at 1.1044.

The gains come after the EU's chief Brexit negotiator Michel Barnier told an audience in Bled, Slovenia that he believes the Withdrawal Agreement can be signed in six to eight weeks. The comments suggest Barnier is standing by last week's assertion by Barnier that negotiations are 90% complete.

"Reports that the EU will give new instructions to its chief negotiator to do a deal on Brexit provided a lift to sterling yesterday. EU negotiator Barnier’s comment that an agreement could be reached by November provided further support as the Pound rose close to 1.125 against the Euro, its highest level since early August," says Rhys Herbert, an analyst with Lloyds Bank.

Of course there will be further volatility for Sterling ahead as the pendulum swings in either direction. If the EU is not a stumbling block, then the UK Prime Minister's own ruling Conservative party could prove to be so. Recent news reports suggest that up to 80 Conservative MPs would be prepared to vote down a deal based on the Chequers agreement.

However, the prime minister has instructed every cabinet minister to tour the country before the Conservative Party conference this month to hammer home the message that Chequers is the "only deal" on the table.

Markets have been heavily pitted against Sterling over recent weeks on fears a Withdrawal Agreement might not achievable in 2018, meaning the prospect of a 'cliff-edge' Brexit in March 2019 was becoming increasingly likely.

The chaos posed by such a prospect saw traders demand a premium for holding onto what was perceived to be an increasingly 'risky' currency, cue months of grinding losses for the British Pound.

But, markets are now discounting this premium and bidding Sterling higher as a result of Barnier's newly-adopted constructive tone.

"It is not the first time that the tough guy Barnier is creating hope on the market that everything will turn out to be alright in the end. But admittedly comments pointing in this direction are now getting more frequent," says Antje Praefcke, a foreign exchange strategist and colleague of Karen Jones with Commerzbank.

Outlook for Pound-Euro Turns Positive

Concerning where the Pound-Euro exchange rate might be headed next, Commerzbank's Jones says for GBP/EUR near-term momentum is positive.

The analyst believes attention has reverted to the upside as the exchange rate has broken above the 55 day Moving Average and she is looking for a more concerted push higher to the 1.1293 August 02 high. Further targets on the chart are the testing of the 5 month downtrend at similar levels.

Above here is the 200 day Moving Average at 1.1321, "and there is scope for these to be retested," says Jones.

Above: Potential targets and technical indicators identified by Commerzbank's Jones.

At the time of writing the Pound-to-Euro exchange rate is quoted at 1.1228 on the inter-bank markets, banks are quoting between 1.0845 and 1.0920 on international payments while independent specialists are seen offering in the 1.1030-1.1170 region.

Advertisement
Get up to 5% more foreign exchange for international payments 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

Gains Could Even Take in 1.16: Soc Gen

Markets have increasingly engaged bets against Sterling since about April when the currency turned lower and entered a medium-term downtrend against the likes of the Euro and U.S. Dollar.

Bets against Sterling were seen reaching elevated levels by August, just when the Pound was plumbing multi-month lows against both currencies.

Typically, when markets are heavily invested in one direction, a degree of unwinding must take place as traders exit the market on even the slightest of good news.

We are told that this 'unwinding' has further to run and therefore Sterling might extend its relief rally.

Guy Stear, an analyst with Société Générale in Paris says "Sterling might bounce" as 'short' bets against the currency come under pressure.

Stear notes:

"The FX winners on Monday were the Norwegian krone, helped by higher inflation and slightly higher oil prices, and sterling. NOK has been dragged lower along with other trade-sensitive currencies, but its current account surplus and positioning are supports. It's too cheap and the most attractive of the European currencies overall.

"If beaten-up currencies are having their day in the sun, the Sterling may join in the fun. Short positions have been building and showed the first signs of turning last week. There is room for a bounce to gain momentum.

"Monthly GDP data were encouraging and as the deadline for reaching a Brexit deal approaches, there seems to be a greater willingness to compromise on both sides of the Channel.

"With EUR/USD range-bounce, a fall in EUR/GBP to 0.85 isn't out of the question at all."

Advertisement
Get up to 5% more foreign exchange for international payments 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