Alert: Pound to Euro Exchange Rate Could be About to Break to Lowest Level in 2 Years

Alert: Pound to Euro Exchange Rate Could be About to Break to Lowest Level in 2 Years

31 March 2016, 16:42
Vasilii Apostolidi

Those who were hoping for the pound sterling to bounce higher towards 1.30 will be sweating bullets.

The British pound appears to be on the cusp of making its next break lower.

We have warned time and again that when it comes to the pound in the current atmosphere there is only one strategy available to you - risk management.

We have suggested those with outstanding euro purchases set their stop-loss levels around the 1.25 area as a break below here invites a decline to 1.22.

No doubt we will be seeing a number of orders being triggered at current levels.

Is this Move Just a Blip Though?

We do caution that we are at the end of the month - a notoriously tricky time for foreign exchange markets.

This is because markets are subject to month-end rebalancing flows.

Managers of passive portfolios, such as index funds, will sell and buy currencies in order to rebalance the composition of their portfolios.

For example, say the UK equity market outperforms the European market by 5% in a given month.

That will make the portfolio 5% longer of pound’s than it was at the beginning of the month.

The portfolio manager must sell the “extra” pounds and buy euros to bring the overall fund back into balance.

These flows can be very heavy at the end of the month and particularly heavy at the end of a quarter.

Once the new month gets underway and these moves are wiped off the slate we will get a clearer picture of where the markets stand with regards to the euro and then pound sterling.

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Why is the Euro so Strong?

The euro is moving higher across the board with a notable break against the US dollar occurring too.

This confirms to us that the euro is in control, rather than any sinister British pound weakness.

Indeed, the pound has been subject to some decent economic data of late with GDP easily beating expectations on the final day of March.

It would appear that the flow of money into the Eurozone is picking up.

“Fading expectations for Fed rate hikes and the notion that the ECB may be done cutting rates could see the impact of a divergent policy outlook between the U.S. and the euro zone fade,” says a note from Commonwealth Foreign Exchange.

The euro rose to a five-month peak against the greenback overnight and continues to benefit from a surprisingly dovish Fed this week.

Last week, the dollar rose on a chorus of more hawkish than expected Fed speakers that not only signalled that rates would likely rise at least twice this year, but that the next rate hike could come as early as April.

This week’s comments from Fed Chair Yellen sounded a contrasting tone and sent the dollar broadly lower. 

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