Pound to Euro Exchange Rate: Recovery to 1.34 is Possible Suggest Latest Forecasts

The solid support seen in the GBP to EUR conversion rate of late has some analysts suggesting a budding rebound could advance  beyond 1.30.

• Market otherwise appears content to pivot 1.2750 or so for now as previous declines are digested
• “With monthly indicators near a floor, only a break below 1.25/1.2346 will lead to a further decline.” - Societe Generale.

Pound sterling has been hands-down the worst performer among G10 currencies this year and based on this form it is quite difficult to excited about the currency's prospects moving forward.

The EU referendum looms like a brick wall that, time and again, sucks the life out of any advances.

The underperformance in sterling is quite stark and persistent with the pound to euro exchange rate falling from levels above 1.42 in November down to 1.26 in March.

However, it is not all bad for those holding out for a stronger pound, particularly if you think the Brexit story, in its current form, is becoming tired.

Studies would suggest that 1.26 is acting as a floor on the declines which while not turning me positive on sterling’s prospects it does suggest that a good base for a rebound is in place.

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While I am not getting carried away, there are those with more experience than I have who believe sterling could move notably higher.

Head of Technical Analysis at Societe Generale, Stéphanie Aymes, notes the euro’s ability to press new highs against sterling is suffering:

“The decline in GBP/EUR after testing key resistance at 1.4285/1.4706 appears to be facing stiff support at a multiyear channel at 1.25/1.2346.

“With monthly indicators near a floor, only a break below 1.25/1.2346 will lead to a further decline.”

Near term, Aymes says a retracement towards 1.2987 and even to last May lows at 1.33/1.3422 can’t be ruled out.

The Euro is Losing Momentum Against Sterling: Commerzbank

GBP/EUR’s new low of 1.2586 has been accompanied by a divergence of the daily RSI, which is reflecting a loss of downside momentum near the previous low – this does not bode well for the prospect of further euro strength argues Karen Jones at Commerzbank.

Jones argues the market is losing downside momentum at the 200 week moving average at 1.2605.

Key resistance remains the four month downtrend line and the 55 day moving average at 
1.2866/1.2909.

The moving averages are being looked at with particular attention thanks to the interest traders show in these levels when basing their trades.

For instance, a move lower may be questioned at the 200 day moving average because there are so many in the market who are anticipating a recovery at this point.

An increase in buying interest at this level therefore gives a mere number on a chart real meaning.

A successful move above the resistance posed by the 55 day moving average, as referenced by Jones, could trigger more gains to the 1.3219 are which corresponds with a 38.2% retracement and the 1.3285 February highs.

Jones says she is however unable to rule out a move to target 1.2453 / 1.2399 as this is the measurement lower from the ceiling at 1.3347 - 1.4415 and where the September low was made.

Further Losses Going Forward Warn AFEX

Lucy Lillicrap at Associated Foreign Exchange (AFEX) concurs with the view held at Soc Gen and Commerzbank noting some of the previous downside impetus has dissipated as prices approach psychological support at 1.2500. 

"While this bearish momentum can still be regained - on an accelerated sell-off for example - the market otherwise appears content to pivot 1.2750 or so for now as previous declines are digested," says Lillicrap.

To reduce negative risk appreciably Lillicrap argues values would need to hurdle at least secondary resistance in the 1.2850 area as well, thereby bringing 1.3000 back into focus within the context of a broader corrective pattern.

Otherwise further losses look likely going forward suggests the AFEX analyst.

DNB Forecasting the Pound to Rise Above 1.30 on Bank of England

DNB Markets are meanwhile warning that markets are overly negative on the British pound’s outlook, from a fundamental perspective.

In a note to clients DNB, Norway’s largest bank, say a solid economic backdrop in the UK should see the Bank of England increase interest rates faster than currency markets presently expect.

Interest rates matter, as a rule of thumb countries with higher interest rates command higher currencies as global investor demand for higher yield ensures money moves into these countries.

So rising UK interest rates would tend to attract currency inflows as investors look to take advantage of improved yield.

This BoE-inspired demand for sterling is likely to pick up argue DNB and they are forecasting the pound to euro exchange rate to hit 1.3158 in three months before heading to 1.38 in 12 months.

“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. Leading up to this we expect to see interest rate expectations pick up and a stronger GBP leading up to this,” says a note from DNB on the matter.