Goldman Sachs on why the British Pound is Favoured over the Euro

FILE PHOTO - A view of the Goldman Sachs stall on the floor of the New York Stock Exchange. REUTERS/Brendan McDermid/File Photo.

Technical strategists at Goldman Sachs have singled out the EUR/GBP exchange rate as a pair to watch in their latest series of technical studies, saying the outlook is ultimately bearish for the Euro against the British Pound.

Sheba Jafari, at the Wall Street investment bank, notes the EUR/GBP recently held the lows at 0.8656-0.8621. From a Pound-to-Euro exchange rate this translates into the testing of multi-month highs at 1.1552-1.16 that we saw in late January following the strong start to the year enjoyed by Sterling.

Jafari says the rally in the Pound against the Euro has "looked more impulsive than the prior ones," adding, "the nature of this consolidation is that of a continuation pattern" which is "ultimately bearish" for the Euro.

Above: Studies showing key levels to watch in EUR/GBP. Image courtesy of Goldman Sachs.

The rally in the Pound came as markets rapidly repriced the prospect of a 'no deal' Brexit taking place on March 29; with traders taking the view that the UK parliament would ultimately be able to demand the government delays Brexit if a deal has not been agreed by this point.

Any delay to Brexit is assumed to be indicative of a parliament unwilling to countenance what is regarded as a worst-case scenario for the British economy, and the Pound.

Furthermore, Prime Minister Theresa May's Brexit negotiator Ollie Robbins has reportedly confirmed May intends to 'run the clock down' to the March 29 deadline, forcing MPs to either back her deal or accept a long delay to Brexit.

However, Sterling's 2019 advance against the Euro appears to have faded towards the 1.16 level; at the time we were conscious that the stalled move was largely a result of the technical resistance layered in this region.

Concerning the outlook, Jafari says she expects the Euro to eventually break lower "if/once the market is able to get through 0.86 support, there’s potential to extend the sell- off down towards 0.8422 and possible as far as 0.8196.

"Reaching this ~0.8196 level would finally complete a very large corrective process that began at the October 2016 peak."

From a GBP/EUR perspective, 1.1630 is the resistance level Jafari says Sterling must break through if a new wave of gains is to commence, with targets at 1.1874 and then 1.22. In short, the Pound is engaged in a recovery move from the post-referendum 2016 lows at around 1.08.

We believe this technical forecast for a stronger Pound will however require a fundamental trigger that pushes the market through resistance.

This trigger wil either be the passing of the Brexit deal, or a delay to Brexit.

NatWest Markets - the investment banking division of RBS and NatWest - have told clients they remain of the opinion the UK and EU will avoid a 'no deal' scenario on March 29. The view is one that is supportive of a stronger Pound, but according to the latest forecasts from the investment bank, the Pound-to-Euro exchange rate should peak around mid-year before a bout of strength in the Euro pushes the pair back down again.

But, 'no deal' will be avoided courtesy of a three month extension to the Article 50 process and a delaying of the Brexit date.

"By removing a potentially damaging 'no deal', would be consistent with further Sterling appreciation and probably one 25bp Bank Rate hike by the BoE," says Paul Robson, a FX strategist with Natwest Markets in London who adds risks to Pound exchange rates are "to the topside".

Natwest Markets economists are forecasting the Pound-to-Euro exchange rate to trade at 1.18 by mid-year, 1.16 by end of September and 1.14 by December 2019.

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