Euro to Pound (EUR/GBP) Downtrend is Nearly Complete Warn Bank of America

The decline in the euro against the British pound could be nearing completion according to a recent analysis issued by Bank of America Merrill Lynch.

Forecasts from Bank of America run counter to consensus on the pound to euro exchange rate (GBP/EUR) - the majority of analysts we follow see significant gains for the GBP in 2015.

The viewpoint presented by Bank of America is therefore of interest to us as it counters the trend and, if correct, poses a risk for those waiting for stronger sterling conversions.

BofA Merrill Lynch - Downtrend is Looking Mature

The latest long-term leg lower in euro sterling (EUR/GBP) has its origins in early 2013 when the shared currency peaked at 0.8800.

It has since found stability at 0.7800 - this point provided solid support back in 2012 and it could well form the end of the current downtrend (see below).

Analyst John Hopkinson at BofA Merrill Lynch tells us that more losses may be experienced before a recovery transpires:

"Both our proprietary positioning models and the Elliot Wave count reflect a maturing downtrend in the EUR/GBP that is nearing completion.

"The initial triangle objective from which a strong rally may transpire is 0.7582. A plausible narrative on timing is that this rally occurs following an announcement of ECB’s QE.

"We expect this rally to offer an attractive trading opportunity, but until there is stronger evidence that the downtrend has completed, we would recommend selling the GBP versus the USD."

Outlook Favours the Euro in Early 2015

Through 2013, the GBP found support as global investors bought into the UK recovery story and purchased shares in UK UK equities.

"In 2014 this reversed, and in November allocation to UK equities was at a two-year low while European equities were bought," notes Hopkinson, "the decoupling thesis is broadly supportive of equities and, therefore, equity inflows are likely to provide support to the EUR/GBP in early 2015.