Pound Exchange Rate (GBP) Down 1.0% vs EUR and USD, More Losses Ahead?

Things really should be going better - a return to form in the economic data and a Bank of England looking to raise interest rates - should be conspiring to push the GBP higher.

We doubt that any economic data can significantly change current market sentiment towards GBP given uncertainty surrounding the upcoming Scottish referendum. "Governor Carney’s scheduled speech in Liverpool could attract some interest. However, GBP will likely remain sensitive to headlines and any new opinion polls on the Scottish referendum; we see risks that GBP may continue to struggle as the referendum approaches," warn Lloyds Bank Research.

At the time of writing (09/09) we see the following levels:

• The pound to euro exchange rate conversion: GBP/EUR has risen 0.03 pct on a day-on-day basis and is now at 1.2494 - could the Scottish sell-off be over for now?
• Pound to dollar exchange rate conversion: GBP/USD is 0.09 pct lower at 1.6091.
• Pound to Canadian dollar exchange rate conversion: 0.08 pct higher at 1.7688.
• The pound to Australian dollar conversion: 0.09 pct higher at 1.7369.

If you are holding out for better rates DON'T HESITATE: Ask your FX provider if they have the relevant stop loss order to protect against downside losses and a buy order to take advantage of your best-case rate when reached. In addition, using an independent provider your bank can deliver up to 5% more FX.

Scotland Fears Simmer, Financial Markets Suffer

The Yes vote to independence is gaining traction and financial markets have been caught on the hop - the base case in current market prices is for Scotland to remain part of the union.

The current selloff represents a repricing in anticipation of a Yes vote.

"GBP/USD found support near 1.6280 on Friday, but has fallen sharply in Asian trading on the referendum news, and there is little prospect of recovery today or in the next few days with the uncertainty now likely to loom over the pound for the next 10 days," says Lloyds Bank Research.

Be aware that there could be a deeper slump against the euro in store owing to the current positioning by investors. Lloyds say:

"While GBP positioning against the USD is not particularly heavy, according to the CFTC data released on Friday, there are still likely to be substantial short EUR/GBP positions and there is a danger that these are squared if the jitters continue."

A Difficult Week for the Pound

It was a surprisingly difficult week for the British pound.  

"Sterling dropped from a high of 1.6445 to a low of 1.6283 against the U.S. dollar and it also lost value against the euro (albeit the decline was small) despite mostly better than expected U.K. data and bold easing measures from the European Central Bank," notes currency analyst Kathy Lien at BK Asset Management.  

Scottish independence fears contributed to the decline, "but at the end of the day, we do not believe that Scotland will successfully break from the U.K," notes Lien - a view that we believe is key to the GBP's outlook.

Why the pound to euro outlook is positive

September saw the gulf between the Bank of England (BoE) and European Central Bank (ECB) grow further.

A divergence in monetary policy which sees the BoE's balance sheet shrinking compared to the expansion planned at the ECB.

As a rule of thumb - an expanding balance sheet = weakening currency, shrinking balance sheet = strengthening currency.

"Stronger data, the unlikelihood of Scottish independence and the divergence in UK-EZ monetary policy are all reasons why we believe sterling deserves to rally," says Lien.  

We would rather watch from the sidelines until the referendum results are known.

If a Yes vote is secured expect the GBP to rally substantially as it makes up for lost ground.

Technically speaking...

This week saw the euro pound rate (EUR/GBP) was close to break resistance over 0.80000 as barriers were mostly cleared on the upside.

Analyst Piet Lammens at KBC Markets tells us:

"On Thursday, the price pattern in EUR/GBP was completely in line with the developments in the headline EUR/USD cross rate. The BoE, as expected, left its policy rate unchanged at 0.5% and the stock of asset purchases at £375B.

"The ECB interest rate announcement also triggered a sharp spike lower in EUR/GBP. The pair fell from the high 0.79 area to fill bids in the low 0.79 area.

"The sell-off in EUR/USD initially caused some limited spill-over effects on cable. Later in the session, the decline in cable continued, but this time it was mostly due to dollar strength. The pair tested the 1.64 barrier after the ECB decision. Additional selling finally pushed the pair to the 1.6350area."

Investors start to shy away from sterling

The latest CFTC Commitments of Traders Report - covering the week ending on Tuesday the September confirms traders are turning away from the sterling.

"GBP continues to fall out of favor with speculative investors.  Net longs were once again trimmed during the reporting week, ending at +9.5K, the lowest reading since November of last year barring one print in January," says a comment on the matter from TD Securities.

This could bode well for any future sterling rallies as it would suggest the scope to build up extended long positions has increased.