Pound to Euro: Losses Tipped to Ease

Pound to Euro: Losses Tipped to Ease

4 April 2016, 13:36
Vasilii Apostolidi

The British pound is advancing on the euro at the start of the new week. We examine why this recovery is due and whether or not the underlying downtrend will resume.

The GBP/EUR exchange rate has recovered back above the 1.25 support zone today following the frantic selling pressures witnessed on Friday the 1st of April.

Some support for GBP has come as the FTSE 100 recovers; we note that the FTSE and GBP do have a correlation which implies overall risk sentiment is important for the currency. Also helping is new that UK construction companies indicated a sustained upturn in overall business activity during March.

The latest Markit / CIPS Construction PMI, out today, read at 54.2, better than the 54.0 forecast and unchanged on the previous month’s reading.

So can the pound cement itself around the support zones at these levels?

On the 30th of March I was writing that the pound may have found a floor against the euro and that April promised to be a steady month for the pair.

I also warned that a capitulation in the exchange rate below 1.25 would invalidate this view.

Unfortunately for those holding out for higher rates the capitulation appears to have take place.

So, where to next for the under-pressure pound sterling?

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The sharp declines seen on Friday the 1st of April, are in the eyes of my colleague Joaquin Monfort, going to struggle to extend owing to the existence of a notable technical support.

The S1 pivot level, which for Monfort is a key support zone, now lies at 1.2452 and suggests sterling could find buying interest ahead of this area.

Others in the market also warn of fading downside pressures.

Commerzbank say the rate is a touch of their target in the 1.2453 / 1.2399 vicinity.

Commerzbank’s technical analyst Karen Jones cited this level as a target as it is the measurement lower from the peak 1.3348 - 1.4415.

Friday’s low came very close to here (1.2470).

Commerzbank now look for the down-move to start to struggle shortly - the 2008-2016 support line is located just below here at 1.2252 so downside scope is “now considered to be limited.”

Key resistance to any up-moves remains the four month downtrend line and 55 day moving average at 1.2807 / 1.2703 and these maintain downside pressure.

Analysts at the world’s largest foreign exchange dealer, Citibank, are turning shy on backing further hefty advances in the euro.

Citi note that much of the euro’s recent advance actually have US dollar selling to thank (seasonality plus Yellen).

These factors are now seen fading and, “weaker EUR fundamentals should now likely re-assert themselves with ECB purchases of debt under its QE programme set to kick start.”

The start of the next phase of ECB QE should result in a roughly 33% increase over existing flows say Citi which sees them bearish on the EUR going forward. 

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