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BofA: Sell the Euro to Pound Sterling Exchange Rate
Strategists at Bank of America are projecting further declines in the EUuro against the Pound as they see signs options investors are looking to fade recent EUR/GBP strength.
A rapid decline in the EUR to GBP exchange has forecasters tearing up their post-Brexit forecasts on the pair with further losses looking increasingly likely.
Analysts at Bank of America Merrill Lynch have written to clients telling them that an in-house quanititative model is signalling the Euro to Pound exchange rate is now a Sell.
The call comes as EUR/GBP falls right back to where it was at the end of September ensuring the hefty losses seen in October - the month of that infamous flash-crash - are unwound.
"This week the strongest quant signal is selling EUR/GBP (FX Quant Trader: Low turnout for EUR/GBP 08 November 2016). Time-zone analysis shows local London-hours demand for GBP continues, supporting the currency. Our favorite expression, based on the positioning model, is to sell EUR/GBP," says Christopher Xiao at Bank of America Merrill Lynch.
Xiao says residual skew has moved firmly for EUR/GBP puts, suggesting options investors are looking to fade recent EUR/GBP strength.
"Plus, Up-Down vol indicator shows greater volatility when the spot goes down. This places EUR/GBP uptrend at risk, in our view," says Xiao.
The British Pound Jumps vs Euro as Exchange Rate Markets Eye Reagan-Thatcher Redux
The GBP to EUR exchange rate hit a multi-week high as markets anticipate the potential for improved economic ties between the US and UK now that Donald Trump has won the keys to the White House.
Pound Sterling delivered its best two-week run in eight years with a rally that’s powered it to its strongest in five and six weeks against the Dollar and Euro, respectively.
The number one reason the British Pound has surged against the Euro and Dollar lies with a sudden rise in developed market bond yields, particularly for bonds that expire over a long-term timeframe.
Investors are demanding a premium for longer-dated debt as they anticipate greater inflation, largely on the back of Trump’s promised fiscal stimulus agenda.
That the Pound was already far below where it should have been based on bond yield differentials has caught market attention and they are quickly racing to reprice the undervalued currency higher.
However, the shifting geo-political landscape is another reason investors have turned less pessimistic on the Pound.
“The only currency in our sample that beat the mighty USD this week was sterling, thanks a combination of continued short covering and some speculation about the UK's improved Brexit negotiating position with a potential US downgrading of its NATO commitments,” says Alvin Tan, analyst with Societe Generale in London.
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Euro to Pound Exchange Rate Projections: Further Losses on the Cards
Foreign exchange strategists are projecting further declines in the Euro against the British Pound following the worst two-week run for the EUR/GBP since 2008.
A rapid decline in the EUR to GBP exchange has seen forecasters tearing up their post-Brexit forecasts on the pair with further losses looking increasingly likely.
In the week ending November 11th the Euro fell from a post-election high at 0.9025 down to a close at 0.8607.
The Euro has struggled in global foreign exchange markets since the stunning upset that was Donald Trump winning the US Presidency.
Going into the election the popular theory was that the Euro would actually benefit on a Trump upset with analysts reckoning the uncertainty posed by Trump would lead to stock market falls which would in turn drive a large repatriation of funds out of the US and back into Europe, driving up the Euro in the process.
The EUR/GBP exchange rate would be a cross caught in the cross-fire of this dynamic, and was also expected to rise.
However, markets like the pro-growth and reflationary theme that they believe Trump represents and have in fact risen with the Dow Jones hitting an all-time high on November 10th.
The Euro has in fact been one of the more notable losers of the post-Trump victory financial marketplace.
As such, analysts at Bank of America Merrill Lynch have written to clients telling them that an in-house quanititative model is signalling the Euro to Pound exchange rate is now a Sell.
The call comes as EUR/GBP falls right back to where it was at the end of September ensuring the hefty losses seen in October - the month of that infamous flash-crash - are unwound.
"This week the strongest quant signal is selling EUR/GBP. Time-zone analysis shows local London-hours demand for GBP continues, supporting the currency. Our favorite expression, based on the positioning model, is to sell EUR/GBP," says Christopher Xiao at Bank of America Merrill Lynch.
Xiao says residual skew has moved firmly for EUR/GBP puts, suggesting options investors are looking to fade recent EUR/GBP strength.
"Plus, Up-Down vol indicator shows greater volatility when the spot goes down. This places EUR/GBP uptrend at risk, in our view," says Xiao.
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British Pound to Euro Exchange Rate Looking Overbought Ahead of Key UK Inflation Release
The British Pound is holding ground against the Euro at the start of the new week but is looking increasingly exposed to a pullback in the near-term.
Sterling declined against the stronger Dollar on Monday, though it has fared resiliently against the Euro which remains one of the biggest losers of last week's election win for Donald Trump.
The Euro could retreat further in the near-term should investors continue to fret over US-Eurozone relations and potential for internal EU political tensions.
In the interim, implied short-term valuations based on interest rate differentials also continue to point the Eurozone's shared currency lower.
At the start of the new week the EUR/USD is nearly a percent down on last week's close as US bond yields continue to rally faster than their Eurozone counterparts.
This dynamic has aided Sterling against the Euro of late and GBP/EUR has risen strongly, breaking above the key 50-day moving average, and rising all the way up to its current levels just north of 1.1600.
The short-term trend has changed from down to up and supports further growth:
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Limited Pound To Euro Rate Movement Today As Potential Brexit Delay Hinders GBP / EUR On FX Markets
Pound to Euro Exchange Rate Close on Supreme Court Judge’s Brexit Challenge
The Pound to Euro exchange rate continued its advance attempts on Wednesday afternoon, but generally trended quite flatly as Sterling trade was weighed on by worries that not only would the Brexit not go smoothly, it may also affect the labour market sooner than expected.
Sterling did outperform the Euro for most of the day however, as populism fears and calls for more fiscal stimulus left Eurozone traders bearish.
GBP/EUR has remained in the area of 1.16 during trading today, while against other peers it has been highly mixed on account of underlying concerns for UK-EU relations.
While UK unemployment in September has fallen and average earnings have risen slightly in the same month, a recent argument from Supreme Court Judge Lady Hale has raised concerns about the present Brexit timeline.
Hale has stated that due to UK law, the Government may have to replace the 1972 EU entry act before it can trigger Article 50 to leave the EU; this would throw off the March 2017 timeframe and likely raise Sterling’s appeal considerably.
Despite investor optimism that the UK may remain stable in the EU for a longer time, this news has only provoked uncertainty at present due to its yet-to-be-proven nature.
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Barclays Forecast Rebound for British Pound to Euro Exchange Rate in 2017
Barclays tell clients they are forecasting a sustained recovery in the GBP/EUR exchange rate through 2017.
2016 has been a testing year for those looking to buy Euros using Sterling.
The GBP/EUR exchange rate has fallen from a high of 1.3675 back in January to a flash-crash low 0f ~1.06.
However, a stabilisation seen since that flash-crash, and a subsequent rebound, has us believing the Pound is forming a bottom to its declines.
At present the pair sits near two-month highs with spot looking to test 1.17 and those making international payments looking at rates in the range of 1.1277-1.1581 depending on who you chose to send money.