GBP/EUR Rate Outlook: Big Moves Due

• Pound to Euro exchange rate latest: 1.1654, down 0.83% on the day
• Euro to Pound Sterling exchange rate latest: 0.8581

Above: Lucy Lillicrap, analyst at AFEX says Sterling is biased to a move lower. Picture: AFEX, Pound Sterling Live.

The Euro is building a head of steam on global currency markets and the recent ranges seen in the Pound to Euro exchange rate are tipped to break down. 

Analysts are saying the recent boost in the Euro comes amidst a shift in expectations regarding future policy at the European Central Bank.

"The euro was off to the races Tuesday as it soared to six-week peaks against the U.K. pound and its strongest in six months against the descending U.S dollar," says Joe Manimbo, an analyst with Western Union.

Not even fresh data showing UK inflation is steaming ahead of consensus expectations has been able to help Sterling against its continental rival.

Typically the Pound would expect a decent higher nudge on such an outcome.

The win of Emmanuel Macron in France has given markets a new reason to buy the Euro now that the threat of a Marine Le Pen-inspired French withdrawal from the Eurozone has abated which will allow the ECB to act with more confidence.

"Europe’s steadily recovering economy is seen weakening the case for the ECB to maintain super low rate policies that, while positive for growth, have been negative for the euro’s appeal," says Manimbo.

Many believe the ECB could soon withdraw those policy measures that have been a weight on the Euro such as record-low interest rates and hefty asset purchases.

The more bullish amongst the foreign exchange analyst community believe the ECB could hint at withdrawing these extraordinary measures aimed at supporting the Eurozone economy by as early as the June meeting.

We are now seeing the market attempting to break out of a period of its recent zone of consolidation.

Technical analyst Lucy Lillicrap at foreign exchange brokers AFEX Ltd says that calling the outlook remains a finely-balanced task reflecting that “the current range here can still break in one of two ways going forward.”

Lillicrap says there has been sufficient compression evident in the GBP/EUR conversion to trigger a sizeable relocation regardless.

Like a coiled spring, a big release of energy in this market is therefore anticipated. The timing and calling of the direction of such a move is the tricky bit but recent action hints that the Euro could win out. 

However, AFEX’s Lillicrap tends to believe that when the coiled spring is released it should move in a direction favourable to the Euro:

“Values recently stalled above 1.2000 and with subsequent gains looking more obviously corrective another test of projected 1.1700 support now looks likely over coming sessions.”

“However an extension below 1.1550 secondary support looks necessary to encourage an intermediate negative view - targeting 1.1250 thereafter,” adds the analyst.

Such a decline would represent a particularly negative shift in sentiment towards Sterling and so far there has simply not been the news-flow required to shift the market in such a manner.

We also note that Lillicrap is looking at this market from a slightly longer-term perspective.

Pound Forecast Lower as UK Economic Growth Slows

GBP was the best-performing currency in G10 until recently thanks largely to Theresa May calling an early general election.

“Given current opinion poll readings and the high likelihood that the election will deliver a Conservative government with a greatly increased majority for a full five-year term, GBP’s performance is perhaps not surprising,” says Adam Cole, an analyst with RBC Capital Markets.

However, the advantage gifted to Sterling by the calling of the election looks to be running short of momentum.

RBC Capital Markets are particularly bearish on Sterling’s prospects as a result and see GBP/EUR dipping below 1.10 before the year is up.

UK data releases have been getting weaker of late and perhaps a sudden drop in UK economic activity could prompt the kind of negative impetus required to send Sterling below the key levels mentioned by Lillicrap.

We have reported at the start of the week that UK employment is forecast to start rising again and could reach 5% over coming months.

Economists at the EY Item Club warned that a factors including Brexit, technological change, demographics and Government policy could all potentially disrupt the UK labour market and change the environment for businesses.

With this in mind, keep an eye on UK employment and wage data due out mid-week.

Ahead of the employment data we have noted Sterling has failed to appreciate despite stronger-than-forecast inflation data being released.

Typically this would move Sterling higher as markets bet the Bank of England might have to consider raising interest rates.

That the currency has actually fallen might suggest that the Pound will remain a passenger to external events for some time.