GBP/EUR Crashes Lower From Best Exchange Rates of 2014

The British pound to euro exchange rate has fallen back down from its yearly highs - just as we had predicted.

The last time we saw the GBP/EUR exchange rate at the highs seen this week was back in August 2013 - the rally back then ran into stiff resistance at these levels, just as it has done now.

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The euro has looked significantly oversold for some time and we would certainly expect the current relief rally to run further before fading.

Why is the Euro Higher?

The euro jumped higher as ECB President Mario Draghi’s press conference did not make any mention of details on the size of the bank’s ABS purchase program or did not make any hints at an increase in the scope of assets to be purchased.

"Investors were looking for some indication that the bank will begin buying government bonds in order to expand its balance sheet and avoid deflation in the 18-member bloc," says Omer Esiner at Commonwealth Foreign Exchange.

Draghi’s lack of mention of outright QE, other than a vague commitment to use “further unconventional measures”, disappointed investors and provided a good excuse to book some profits on the single currency’s recent slide.

Euro Still Trending Lower

The euro's decline against both the dollar and pound sterling reached a new benchmark on Tuesday in response to the slower-than-expected (core) inflation growth in the Eurozone for September.

Core inflation has fallen to a five year low, Eurozone core CPI printed at 0.7% versus 0.9% eyed - well below the ECB's target of 2%.

While the ECB has not acted this October markets expect action in coming months.

"The latest inflation data suggests that price pressures in the region are non-existent as demand remains tepid and fears of disinflation begin to take hold. The figures are likely to put further pressure on ECB to begin an aggressive easing program in order to stimulate demand," says Boris Schlossberg at BK Asset Management.

Indeed, up to 1 trillion Euro could be pumped into the Eurozone economy in coming months.

Beware, GBP/EUR is Now Overbought

The potential for a correction lower in the pound to euro exchange rate must however not be discounted.

The daily charts are showing the Relative Strenght Index (RSI) to be at 71 - anything over 70 indicates an asset is overbought and a correction could be about to ensue.

However, before we call a corrective move lower it must be noted that GBP/EUR has been technically overbought since the results of the Scotland Independence referendum were made known indicating that overbought conditions can persist for long periods.

United Kingdom GDP Adds Extra Impetus

Elsewhere UK GDP final reading for Q2 was revised to 0.9% from 0.8% slightly beating market expectations.

This helped GBP higher against a host of major currencies.

However, the pound dollar rate tumbled in a the face of a fresh onslaught from the bullish USD.

"The pair dipped below the 1.6200 level before popping back above that level in volatile London morning trade. Cable has struggled over the past month as the dollar juggernaut and the Scottish referendum has pushed the pair more than 900 points lower off its yearly highs," says Schlossberg.

Yet the UK economy continues to post some of the best results in the G-7 universe and there is still a strong chance that the BoE will be "first to hike" since the 2008 credit crisis.

Later in the week the market will get a glimpse at the troika of UK PMIs and if the data proves positive, cable may get its bid back.