Euro / Pound Range Eyes Test of 0.79, Longer-Term Bias Higher Intact

The euro has taken back the initiative against pound sterling after a soft start to March and is likely to continue its ascent until mid-year 2016.

The marketplace for the pound and euro remains structurally biased in favour of the single currency studies show.

The euro to pound exchange rate (EUR/GBP) has been ascending since December 2015 allowing the market to gradually, yet confidently, develop a pro-EUR bias which is likely to remain in time for some time.

Of late though the pound has found some support ensuring the exchange rate has been restricted to a tighter range:

We see this as a corrective move that will likely give way to the dominant trend.

That said, others believe the period of pound strengthening and euro weakening could extend a while longer.

“EURGBP is currently trading in the middle of a 0.7650 to 0.7925 range. Intra-day momentum studies continue to support a bearish bias, with a move back towards 0.7695/65 possible,” says Robin Wilkins at Lloyds Bank.

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The short-term moving average, which was the base of the last move lower (at 0.7650), could provide initial support at 0.7720 it is argued.

0.7855/70 is intra-day resistance and should cap any rallies.

“Medium term, the trend from 0.70 to current levels is intact and still risks an eventual move to key long-term channel and Fibonacci resistance in the 0.80-0.82 region,” says Wilkins.

The analyst believe only a decline through 0.7550/0.7450 would suggest those levels won’t be reached and that a significant high is in place for a move back towards the 0.73-0.70 support region.

Fundamentals Argue for Decline to 0.72

While the technical setup in the EUR/GBP marketplace argues for further rises in the exchange rate over the longer-term, fundamental studies suggest this may not quite be the case.

Driving the debate concerning the pound’s fundamental outlook are the Bank of England and the EU referendum.

It is widely accepted that the pound is trading well below where it should be were it not for the risks implied by the EU vote.

As such, should the ‘In’ vote prevail in June, as most analysts and betting markets believe, then the pound should make a rapid recovery against the euro.

This will see the EUR to GBP conversion fall.

Then there is the Bank of England; analysts believe the Bank will be more inclined to raise interest rates in the wake of the vote having passed.

“We think the market is under-pricing the timing and pace of Bank of England rate hikes. We expect the central bank to start hiking in November,” says DNB Banks’s Magne Ostnor.

DNB forecast EUR/GBP to rise to 0.77 in one month, 0.76 in three months and then fall to 0.72 in 12 months’ time.

The exchange rate is currently at 0.7583.