The Pound to Euro Rate Could Now go Down to 1.10 

Pound Sterling was seen staging an impressive recovery against the Euro but what will it take to turn us bullish on the currency’s prospects?

Over the course of the past 24 hours Pound Sterling has fallen through a significant support level against the Euro at 1.13, and the loss of this support now opens the door to the potential for further losses.

While the exchange rate has recovered some ground following the release of better-than-forecast labour market data, the technical outlook remains relentlessley negative UNLESS the 1.13 can be reclaimed in convincing fashion.

By convincing, we mean the pair must close above there over coming days.

Our bias is still negative until the above conditions are met.

The exchange rate hit an eight-month low after a batch of sell-orders were triggered in earnest after GBP/EUR fell through the 1.1250-1.1300 floor as traders were prompted to buy Euros to protect their books from potential losses.

The Bank of England’s Deputy Governor Ben Broadbent was seen as being behind the sell-off on Tuesday, July 12 after he failed to back calls for higher interest rates made by his fellow Bank of England policy-makers in a speech made in Aberdeen.

The Deputy Governor then went a step further in an interview with a regional Scottish newspaper following the event saying he does not believe the time is now right to raise interest rates.

The report, filed early mid-week, has allowed further follow-through selling of Sterling as the interview clears up any ambiguity concerning Broadbent’s stance over the matter and confirms the bar to an interest rate rise in coming months remains high.

“If you look at the past six to 12 months, economic growth has been okay and the employment rate good. Unemployment has drifted down a little … and inflation is higher,” says Broadbent. “There is reason to see the committee moving in that direction (higher interest rates) – but there are still a lot of imponderables.”

Recall, the Pound has been under pressure through the course of June and early July as a mix of political uncertainty and slowing economic data take their toll.

Some respite was however provided by the Bank of England towards the end of June where a handful of key policy-makers suggested an interest rate rise might soon be necessary.

Both Governor Mark Carney and Chief Economist Andy Haldane said that were data to improve they believed a rate rise would be necessary.

But, this pillar of support has been kicked out from beneath the Pound. GBP/EUR has made big moves as it had been consolidating in a tight range between 1.13 and 1.14 of late.

Such consolidation tends to act as a coiled spring with big moves seen once the spring is released and we could well be witnessing such an outcome.

Where Next for GBP/EUR?

Analyst Robin Wilkin at Lloyds Bank notes that GBP/EUR has dipped and is consolidating below 1.1236, “driven by post-Broadbent GBP weakness and EUR breaking above key 1.1450 range resistance,” against the Dollar.

Intra-day momentum is at oversold levels though, “but as long as retracements hold” below 1.1235-1.1299, Wilkin looks for a test of 1.11.

Wilkin is a technical strategist and his forecasts differ from the official forecasts for GBP/EUR held by economists at Lloyds who see the exchange rate holding around 1.13 into the end of 2017.
In fact, technical analysts are on the whole more bearish on Sterling than their fundamental counterparts.

Lucy Lillicrap, a technical analyst with Associated Foreign Exchange believes the entire recovery sequence seen in GBP/EUR from last October when it recovered from flash-crash lows below 1.10 back to 1.20 is merely corrective.

“Further deterioration is anticipated going forward,” says Lillicrap who believes the Pound’s big move lower from the EU referendum vote is still playing out.

Lillicrap believes the psychological 1.1000 level should come into focus again thereafter as that longer term GBP downtrends resume.

Our technical analyst Joaquin Monfort noted that the sell-off in Sterling even cleared an obstacle in the form of the S1 monthly pivot at 1.1247 level.

Both Lillicrap and Monfort believed this would provide some temporary respite for Sterling, however this did not transpire.

“Although there is a bias to further downside, we would first want to see a clear break below this level, signalled by a move below 1.1200 for confirmation of a continuation of the bear trend down to the next target at round number support at 1.1100,” says Monfort.

Watch employment data released at 09:00 London-time, if it beats expectations it might benefit Sterling.

But we see little prospect of relief for Sterling at present.

Could Sterling Fall to 1:1?

The outlook is not constructive for those hoping for a stronger Pound if analysts at HSBC and UBS are correct.

HSBC have warned that they see the Pound to Euro exchange rate equalising over coming months.

UBS see the decline stopping before there but warn that it could go below 1:1 if some conditions are met.

We had thought these views to be a little extreme, but now that Sterling is breaking lower they suddenly look a little more possible.

Source: PoundSterling – The Pound to Euro Rate Could Now go Down to 1.10

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