Forecasts: GBP/EUR Heading to 1.25 Again, Pound Dollar Looking Oversold on Global Exchange Rate Markets

For your reference:

• Pound to euro exchange rate: 0.31 pct lower on a day-to-day basis at 1.2560.
• Pound to dollar exchange rate: 0.17 pct lower at 1.6805.

NB: The above mid-market rates will attract a discretionary spread when your bank delivers your currency. Note, an independent FX provider will seek to undercut your bank's offer and in some cases can deliver up to 5% more FX. Please learn more here. 

Forecasts: Is GBP/EUR due a correction lower?

Sterling has made an emphatic comeback against the shared currency on Tuesday after UK economic data played right into the hands of sterling bulls.

It has been a tough few weeks for those holding out for a stronger exchange rate; part of the reason for the July declines lies with the break-neck rise in GBP through much of 2014.

The currency was looking overbought and due a correction.

Bill McNamara – Technical Analyst at Charles Stanley - is forecasting an ultimately firmer GBP in the long-run but warns a pullback could still be possible:

"The UK currency posted its fourth consecutive monthly gain relative to the euro last month and if there is a question mark over the short-term bull case it is the manner in which it retreated from its recent closing highs (at 1.2674).

"That said, the 14-week RSI had lately pushed up to a two-year peak and some profit-taking had become a realistic expectation. In fact, further profit-taking still looks possible, although short-term support at around 1.25 looks possible (where the 50-day MA now stands)."

Sterling continued to favour its back foot and remained near mid-June lows against the greenback after the Bank of England, as expected, left its monetary policies unchanged.

No statement was issued which is the norm when bankers keep rates and QE unchanged.

"Circle Aug 20 on your calendar, though. That’s when the BOE will publish what went on behind closed doors at this week’s meeting. Should the minutes show a splintering Monetary Policy Committee with some members voting for a rate hike, sterling would stand to rally anew," says Joe Manimbo at Western Union.

Pound dollar exchange rate: Oversold?

The US dollar has been in the ascendency through much of July thanks to strong economic data releases.

The GBP/USD has fallen from its best levels in years, however McNamara reckons that the GBP could now be oversold:

"The recent slump in the pound relative to the dollar has seen it fall in eleven of the last thirteen sessions and, as the chart below demonstrates, this has taken it through its short-term uptrend in a fairly decisive manner.

"However, this slump has left sterling looking more oversold than at any point over the last seventeen months and a trading bounce is now possible. Longer-term, however, it looks like the rally has peaked."

Pound dollar rate technical forecast

GBP/USD showed signs of buying interest yesterday after its relentless decline since mid-July.

"However, the hourly resistance at 1.6893 (01/08/2014 high) needs at least to be broken to suggest some exhaustion in short-term selling pressures. Another resistance can be found at 1.6928 (intraday high). An hourly support lies at 1.6814. In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A key support stands at 1.6693 (29/05/2014 low)," says Peter Rosenstreich at Swissquote Research.

Near-term outlook: ECB and BoE decisions

Things will turn livelier on Thursday with both the ECB and BoE holding their monetary policy meetings and the BoJ following suit on Friday.

"Expectations are low for any of them to deliver much new information.  For the BoE, we will have to wait for the Inflation Report next week to assess how much of a risk there is for a first hike this year.  In turn, both the ECB and the BoJ will have to address weaker than expected growth into midyear and inflation moving in the right direction but still at a slow pace," says Shaun Osborne at TD Securities.

President Draghi will also have to discuss the bail out of Banco Espirito Santo announced by Portugal over the weekend.  Still, we think he will add little new content now, and the markets will be more interested on the September meeting with new forecasts and leading into the first TLTRO tender on September 18th.