'Sell on Rallies' Strategy for Euro Pound Exchange Rate Stays

The pound sterling (GBP) is tipped to enjoy a recovery on the currency markets as we move into 2015 with the possibility of a test of 1.2894 being possible in the near-term.

That said, those with an interest in the pound and euro will need to hold their nerve when the UK currency dips - as we have seen in recent weeks the slides can be deep. Indeed, the run-up to November has been soft for the GBP with the EUR showing some stubborness.

But, if history is to repeat itself, as the below image shows us, dips are ultimately followed by fresh rallies to new highs:

Our last quote on the pound to euro exchange rate sees 1 GBP convert into 1.2652 EUR. Turning the equation around the euro to pound exchange rate sees 1 EUR convert into 0.7905.

Note: If you are looking for a higher rate ask your FX provider to put the relevant buy and stop-loss orders in place to ensure you get the right rate when it is hit.
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Where is the Pound Heading Next?

The outlook for the pound against the euro is expressed, technically, through studies of the EUR/GBP equation (Just divide 1 by any EUR/GBP rate you see to arrive at the GBP/EUR rate).

Analyst Piet Lammens at KBC Markets confirms any euro strength is likely to be fleeting:

"We had a sell-on upticks approach for EUR/GBP. We maintain the view that the trend in EUR/GBP stays downward longer term.

"Short-term, the trend shows some signs of fatigue. The 0.7850/0.7755 is a tough support short-term. Important resistance stands around 0.8066. We take a more neutral approach on the EUR/GBP cross rate short-term."

Luc Lluyet at Swissquote Bank also notes that the GBP has run out of steam in the near-term, but this fits in with the notion that a run higher to 1.2997:

"EUR/GBP has declined after its successful test of the key resistance at 0.8034. The short-term technical structure remains weak as long as prices remain below the hourly resistance at 0.7942 (21/10/2014 high). Hourly supports can now be found at 0.7871 (23/10/2014 low) and 0.7821 (03/10/2014 low).

"In the longer term, the underlying downtrend favours a test of the major support area between 0.7755 (23/07/2012 low) and 0.7694 (20/10/2008 low) at minimum. A decisive break of the resistance at 0.8034 (25/06/2014 high) is needed to suggest some exhaustion in the medium-term selling pressures."

Note that 0.7694 EUR/GBP = 1.2997 GBP/EUR.

Euro To be Undermined by European Central Bank

The cost of borrowing in euro's has plummeted in recent times ensuring the currency is now a favourite amongst those looking to invest in higher-yielding assets elsewhere in the world.

This funding function demand on the euro will likely see it kept under pressure as euro's are used to buy other foreign currencies.

Driving down the costs of borrowing the euro will be the proactive European Central Bank.

The ECB is widely tipped to engage in a fresh round of quantitative easing in coming months.

The idea is to push the loan book of the ECB back up to the highs seen in 2012.

A fresh boost was afforded to GBP/EUR in mid-October when the European Central Bank announced that it was taking a proactive approach to halting the Eurozone economy's slump by entering the secondary corporate bond market.

The ECB may decide on the matter as soon as December with a view to begin purchases early next year Reuters reports.

The news will remind markets that there is potentially a great amount of EUR-negative news, and action, due to come out of the ECB in coming weeks.

Keep an eye on the November PMI data from the UK for near-term direction in the pound to euro rate.