Pound to Euro Forecast to See Pace of Gains Ease

Pound to Euro Forecast to See Pace of Gains Ease

27 April 2016, 22:50
Vasilii Apostolidi
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Pound sterling is failing to kick higher against the euro despite some better-than-forecast UK GDP Numbers.

The British pound appears to be stalling around current levels (1.2850-1.29) with a steady supply of sterling being made available to the market on attempts to breach the pair’s 100 day moving average.

The inability to break higher comes despite the release of better-than-forecast UK economic growth figures; UK GDP rose 0.4% in the first quarter of 2016 while the annual figure now stands at 2.1%.

We have noted time and again that moving averages are a big deal to the GBP-EUR pair and the last time GBP/EUR breached the 100 day moving average was back in October 2015.

Nevertheless, there are some advocates who believe the push higher is by no means over.

CitiFX note that now the GBP to EUR exchange rate pair has broken above 1.2739 resistance and the technical backdrop suggests a re-test of 1.2893 followed by 1.3158.

Ultimately, for the pound we believe questions of sentiment and technicalities will continue to be of utmost importance.

“Interestingly, 12-month BOE rate hike expectations have firmed and the British Pound has traded higher even as UK economic data outcomes has deteriorated relative to consensus forecasts in recent weeks,” says Ilya Spivak, Currency Strategist at DailyFX.

Spivak confirms that this apparent mismatch may be accounted for by receding risk of a UK exit from the European Union in the minds of investors.

Indeed, mentions of “Brexit” have become less frequent in global news flow tracked by Bloomberg.

“If the risk premium associated with the June referendum on membership in the regional bloc is truly dissipating, then even soft GDP figures may be unable to inflict lasting pain on the currency,” says Spivak.

More Resilient Sterling

The implied probability of a vote for “Bremain” has risen several percentage points to about 75%, according to bookmaker Betfair.

Ladbrokes' indicates a 73% chance of Britain voting to remain post-Obama and William Hill sees "Brexit at longest odds yet of 13/5" and Remain at 2/7.

“GBP finally shows more positive signs of holding onto gains above 1.44 with GBPUSD making an important close above 1.4458 and officially ending a series of lower highs since June 2015. This suggests a near-term trend change,” say CitiBank’s FX unit in a note to clients.

Overall, there now seems a more decisive sentiment shift in favour of sterling but the key 1.4515 pivot still stands as a major hurdle for the GBP/USD pair to cross for now.

Staying Bearish

Analysts at Standard Chartered meanwhile warn that it is too soon to be outright bulls on the GBP/USD exchange rate, a view echoed elsewhere.

“While some recent polls may have suggested a lower probability of a ‘Brexit’, we do not believe this will alter the uncertainty with respect to the currency until the June referendum itself,” say Standard Chartered in a foreign exchange briefing to their Wealth Management Group clients.

Standard Chartered also continue to expect the BOE to remain on the sidelines until this event.

Concerning the outlook for GBP/USD analysts believe the move higher in GBP/USD will be restricted to the 1.45 resistance region:

“This suggests the pair overall remains in consolidation territory. We expect the pair to trade in the 1.40-1.45 for the time being, a break in either end of this range may be a signal for a resumption of a broader bullish-bearish trend.” 

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