Take Note: Pound at Over-Extended Levels Against the Euro

The British pound to euro exchange rate (GBPEUR) has enjoyed 7 days of consecutive gains ensuring the move is now looking over-extended.

The fundamental underpinning of GBP's strong moves is solid - global capital chases higher interest rates in the hunt for yield, news that the UK will offer improved returns over coming years has seen a flood of inbound cash push the British pound higher.

The pound to euro exchange rate conversion (GBPEUR) expressed this newfound strength by breaking above the 1.42 resistance zone and taking euro buyers to 1.44 where the pair is likely to commence trade when Asian markets open.

Typical high street banks were quoting nearer 1.3930 for international payments though while independents are coming in a great deal closer to the market at 1.4160. Often up to 5% more FX can be achieved by engaging specialists to conduct payments.

Mark Carney has spent the past week preparing U.K. investors for higher interest rates, pushing the pound to its best performance versus the euro in more than six years.

“It has climbed 3.3 percent this week, the biggest gain since January 2009 (when it rose from 1.0460 to 1.1260). Sterling touched the strongest level since 2007 against the shared currency this morning after the Bank of England governor talking about the timing of rates rises yesterday,” says analyst Lucy Lillicrap at AFEX.

Carney, at a speech in Lincoln Cathedral, said that “the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year,” and “the need for bank rate to rise reflects the momentum in the economy and a gradual firming of underlying inflationary pressures.”

Markets are currently fully pricing in an increase to UK base rate for May 2016, that compares with August as recently as last week.

“The expectation that interest rates will rise should remain Sterling supportive but at this stage market participants seem reluctant to enter into long term positions to buy the Pound so the way forward is likely to remain volatile, albeit within a continuing long term uptrend against the Euro, through the summer months,” says Lillicrap.

Those looking to take advantage of higher rates over coming months should ensure they have the correct buy orders set with their FX provider – when the rate is achieved the payment is executed automatically ensuring best rates are not missed.

For now we expect sideways action to dominate proceedings as the recent rally retraces in response to over-bought conditions.

The Rally Could be Due a Pause

Those with currency payment requirements should also be aware that the GBP-EUR move higher is looking over-extended. 

The Relative Strength Index (RSI) on the GBP-EUR charts shows a reading of 69. A reading at or above 70 indicates overbought and traders consider this a sign that a pullback or period of consolidation is due.

Could this occur over the course of the coming week?

There is no saying when consolidation could happen but at the very least we could see a settling down of the pair ahead of eventual gains. 

It must however also be pointed out that momentum lies in favour of the GBP and as such there is little reason to actively bet against GBP-EUR.

The break of resistance at 1.42 could prove decisive to the outlook as it potentially opens the way to yet higher levels. We now see 1.42 forming imporant support below which a the currency pair is unlikely to go.