Big Break Lower in Pound-to-Euro Exchange Rate Underway

Image © kasto, Adobe Stock

Pound Sterling is coming under substantial stress against the Euro as markets work through the mid-day point of the London trading session. 

The GBP/EUR exchange rate has just recorded a fresh three-month low at 1.1294 with the break of the 1.13 support level possibly a crucial move in the context of the exchange rate's long-held range.

Robert Howard on the Thomson Reuters currency desk says month-end buying is being mooted in currency circles as being a factor in the Euro's rise to its highest level in the second quarter.

Importantly, if correct and there are technical drivers behind the move then we could expect many of the losses suffered by Sterling against the single-currency to be reversed once flows have completed.

But, Brexit concerns remain a fundamental concern for the UK unit with the clock ticking ever closer to key deadlines. Ahead of the EU summit, starting today in Brussels, foreign exchange strategist Viraj Patel at ING Bank N.V. warns the British Pound is looking particularly vulnerable.

"Warning, GBP looking extremely vulnerable right now. Base case is that GBPUSD hold's 1.30. But if EURGBP posts a topside breakout from its narrow range, it doesn't look pretty for GBP. Surprisingly UK data has been ok, but won't take much bad Brexit news to take the Pound down," says Patel.

Patel has struck a relatively optimistic stance on Sterling over recent months, and therefore his views are not taken lightly.

The reason Patel is worried is because at the time of writing the EUR/GBP's ascent now leads it to threaten 0.8843, which in GBP/EUR exchange rate terms translates into a threatening of the floor at 1.13.

Above: GBP/EUR looks to test the floor, if it gives way we could see accelerating broad-based Sterling weakness.

We have noted for some time now that the GBP/EUR exchange rate pair is subject to a very restrictive range and would expect it to stay within the range, but a break out of this range could potentially invite a strong directional move, and for Sterling-Euro it appears that it will be to the downside.

"Currently, risks to the GBP/EUR appear to be roughly offsetting, but that may not remain the case. The fact that these drivers could converge at any point in time, to either support EUR or GBP, means we must remain constantly vigilant, especially as the tendency following a break of an entrenched range is for a marked price move," says Gajan Mahadevan, a Quantitative Strategist at Lloyds Bank.

Analyst Shaun Osborne at Scotiabank in Toronto is also watching the impact GBP/EUR is having on the GBP/USD exchange rate, and like Howard, cites the potential for month-end flows as being behind the move:

"The GBP has traded softly through the overnight session – on apparently little or no news- There are no
economic reports of note and little new in terms of Brexit. Sweden warned that “’hard Brexit” risks are rising – no shock – and Ireland reiterated worries about border issues – ditto. Cross flows perhaps account for the dip in Cable, with EURGBP gains through May/June highs around 0.8840/45 triggering stops and lifting the cross to its highest since Mar."

GBP/USD continues its decent, but technical analysts are looking for support buying to potentially come to the fore:

Above: GBP/USD's decent would take a lead from a break in GBP/EUR and work fresh 7-month lows.

"Prices have dropped sharply back through our 1.3220-1.3180 area of support and the previous 1.3102 lows. We risk a deeper setback to next supports in the 1.3000-1.2935 region, but our medium-term studies at this stage still suggest the downside should be limited for a reaction higher," says Robin Wilkin, a strategist with Lloyds Bank.

Making a nice juxtaposition to Patel's warning is the suggestion by Lee Hardman at MUFG that Sterling has absorbed a great deal of bad news of late and therefore it remains susceptible to any improvements in sentiment.

Even the slightest progress on Brexit could therefore enable a decent recovery in July.

Analyst Thu Lan Nguyen with Commerzbank is actually quite sanguine on Sterling re. Brexit saying to him the market still appears relaxed about Brexit, which is likely to be due to the fact that it continues to expect a last minute deal.

"For now it seems that there is plenty of time until October – when an agreement should be reached to give the national parliaments of the EU members sufficient time to ratify the agreement. My guess? The market is only going to get really nervous a few days before the deadline. Until then I do not expect any major momentum for the GBP exchange rates from any Brexit news. As a result today’s World Cup match against Belgium is likely to be of more interest to the Brits than the EU summit," says Nguyen.

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