The Floodgates Open: Pound to Euro Breaks Below that Key 1.25 Level

The Floodgates Open: Pound to Euro Breaks Below that Key 1.25 Level

5 April 2016, 19:50
Vasilii Apostolidi
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We have been saying for some time now that the outlook for the sterling-euro conversion depends on how the 1.25 support zone holds out.
On Tuesday the 5th of April it appears that the flood gates have opened and the pound is rushing lower against the euro.

At the time of writing the GBP/EUR exchange rate is seen at 1.2433 as the pound moves lower in sympathy with weaker global stock markets which are in turn being undermined by falling oil prices.

The pound has shown it is closely correlated to risk sentiment of late, so when markets fall, so does the UK currency.

Sterling has relied on the level at 1.25 to provide support in the past; as the below graphic shows buyers could reliably be found to buy sterling on dips below this pound for much of 2014:

We had assumed that this could well be where the declines settle at the start of a range-bound April; unfortunately for the UK currency our earlier assumptions appear to be incorrect.

I have my eye set on that cluster formed in February-April 2014 as the next potential congestion zone that could halt selling pressures.

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The whole thing is debateable of course.

My colleague Joaquin Monfort says 1.25 is actually not a support area at all and we should rather be watching 1.2452 which forms the S1 monthly pivot according to the studies he has conducted.

Monthly pivots are a product of the previous months’ high, low, close and open and traders use them as focal points where prices often change direction.

Either way, be it at 1.2452 or 1.25, support appears to be under considerable pressure.

The question now is where will the euro move to before it finds any buying interest?

According to Monfort, the next target to the decline is the S2 pivot at 1.2360 where a bunch of buyers are likely to be clustered.

“A significant basing exercise will be needed to reduce this macro bearish risk and in the meantime potential still exists for a sell-off toward 1.2400 or so over coming weeks,” says analyst Lucy Lillicrap at Associated Foreign Exchange in London.

According to Yann Quelenn at Swissquote Research the technical in the GBP/EUR market suggests that the pair should show continued declines.

In the long-term, the technical structure suggests a growing downside momentum; the pair is trading well below its 200 fail moving average, which from a technical point of view, is an all-out negative. 

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