We Enter October Seeing Best GBP/EUR Exchange Rate of 2014 (But Beware the EUR Bounce!)

However, we do note that the potential for a euro bounce-back is high at the present time which could provide for some hightened volatility.

The GBP/EUR commenced weekly trade at 1.2812, at the time of writing on Wednesday the rate is at 1.2856.

The previous best sterling euro rate of 2014 was achieved on 25th September when the pair hit 1.2845, we have not seen today's levels achieved since April 2013.

(Note that you are at risk of losing significant amounts if your FX provider has not set a stop-loss order for protection. Also ensure your provider has a buy order set to trigger when your desired rate is reached. Find out more).

"Evidence of worsening economic conditions in the euro zone took another heavy toll on the euro which plunged to two-year lows against the greenback below $1.26. The latest dagger came from inflation slowing to a 0.3 percent increase in September, a mere fraction of the ECB’s ideal level near 2 percent," says Joe Manimbo at Western Union.

But, Is Sterling Euro Rate Now Overbought?

The GBP/EUR enjoyed four days of climbs - nothing ever moves in a straight line and that is why Pound Sterling Live is warning that a period of consolidation could occur before the best rates are achieved.

A look at the charts shows that the Relative Strength Index (RSI) for the pair is currently located at 69.5 on the daily charts.

Any reading at or above 70 indicates that a financial product is overbought and thus a decline could be in the offing.

The RSI typically exists between 70 and 30 and thus it is an incredibly reliable indicator when it comes to judging whether a move is becoming exhausted.

Also note that the market is becoming very low on euro sellers - essentially anyone willing to sell the euro at the current time most likely has. This exhaustion could lead to a rapid reversal as even the slightest uptick could snowball.

However, best euro rates are possible this week

While the prospect for a decline in the GBP-EUR exchange rate remains possible we must be aware that all other indicators are overwhelmingly bullish.

Trend and momentum resides with the GBP and with the prospect of further expansionary monetary policy action coming from the European Central Bank (ECB) will mean the euro is unlikely to find any sustained buying interest long-term.

Commenting on the outlook for sterling euro is Bill McNamara at Charles Stanley:

"The decision on the referendum provided sterling with a tonic following several weeks of uncertainty and its 1.19% advance lifted it through the top end of its recent range and to a two-year high.

"The next upside target is going to be the peak from July 2012, at 1.285, and it would not be surprising if that level was tested at some point over the next few weeks."

Outlook for Euro is Broadly Negative

The euro recovered from a 22-month low against the dollar yesterday as investors took some profits on the single currency’s impressive selloff.

"While day-to-day volatility could lead to some near-term strength in the euro, its medium to longer-term outlook remains broadly negative given the clearly divergent rate outlook in the U.S. and euro zone," says Omer Esiner at Commonwealth Foreign Exchange.

ECB Easing is Key Risk

Esiner tells us more about the possibility of further action at the ECB:

"The euro fell again overnight but remained off of a 22-month low struck against the dollar early yesterday. The single currency continues to struggle on a broad basis as a result of mounting expectations that the European Central Bank will follow up on recent monetary easing with additional stimulus, likely in the form of money printing to purchase sovereign bonds.

"The ECB already adopted negative deposit rates for banks and announced a plan to begin purchasing assets (ABS and covered bonds) in a historic announcement earlier this month. The recent monetary easing by the ECB while necessary, was likely not sufficient in meaningfully stemming the risk of another dip into recession or outright deflation in the 18-member bloc.

"Consequently, the risk of additional easing by the ECB should keep the euro biased broadly lower, especially in light of the contrasting outlook for U.S. monetary policy, which is seen becoming tighter next year."