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AFEX: Pound to Euro Exchange Rate Recovery Untenable
Pound Sterling remains in a corrective period of appreciation against the Euro and this should not be mistaken for a sustained recovery argues a leading techncal analyst.
Sterling has recovered from lows registered near 1.10 to the present valuations above 1.17 in a move that has many watching the market believing the great 2016 sell-off could be over.
However we are told that current strength is seen as a response to prior oversold readings only and on this basis should prove corrective and therefore untenable.
Analyst Lucy Lillicrap has taken a look at the recent price action for clues on future direction.
Her belief that Sterling is not yet in a position of sustainable strength against the Euro is premised on the need for some clear triggers to be pulled.
The rules written into technical analysis allow us to approach a currency pair with a cool and logical head which helps us to avoid mistiming the market.
"The market would need to establish itself back beyond 1.2000 at least to reduce negative pressure meaningfully otherwise the relative absence of base work argues upside scope has already become somewhat limited," says Lillicrap.
Furthermore, "a drop back through 1.1625 will be required to signal an interim top has been seen but resistance also begins at 1.1875."
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British Pound Slides Against Euro as Trump Trade Fades on Global Exchange Rate Markets - But is it Dead?
Global foreign exchange market dynamics remain in the driving seat for Pound Sterling with the currency sliding as the market effects of Donald Trump's election victory starting to fade.
Sterling is the week's worst-performing currency in the group-of-ten of the world's most liquid currencies as the effects of Donald Trump's election victory start to fade.
This has been a positive month for the UK currency which is actually the best performing currency in G10 thanks to Trump.
The great November Trump-Trade shifted focus away from Brexit and allowed the Pound to move higher as traders factored predicted a new world order of stronger growth and higher inflation which saw stock markets rally and bond's slump.
"The revised view of a Donald Trump Presidency is that his fiscal largesse will spur growth in the US for many years to come, hence the rally in stocks and sharp increase in Treasury yields," says Kathleen Brooks at City Index.
Importantly, these moves were mirrored in UK counterparts which had the most catching-up to do after their Brexit battering.
Gilts fell, Gilt yields surged and Pound Sterling was sent higher as a consequenice.
"Although the news flow is good for Trump’s expected economic policies, the markets may have run out of steam," says Brooks.
Is this dynamic ending and with it the Pound's period of appreciation against the Euro?
"In the short term, we expect some modest losses for US stock indices, along with a slow down in the pace of dollar strength. Overall, the Trump trade, which has been positive for US stocks and the dollar, could start to slow, but we doubt it will disappear altogether," says Brooks.
Brooks believes that overall, the Trump-trade, which has been positive for US stocks, UK stocks, Gilt Yields and therefore the Pound, "could start to slow, but we doubt it will disappear altogether."
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The pair is very bearish at the moment, but I am waiting for it to break below 0.8490 to open a short position. I missed the opportunity to do it earlier.
Pound to Euro Exchange Rate Forecast Back Above 1.20
The rally in GBP/EUR is by no means over says a leading foreign exchange analyst.
The GBP/EUR pair has risen from the 1.09s of the October flash crash to November highs at 1.18.
The pair has however been unable to breach the resistance point at 1.18 with questions being asked if the uptrend is in danger of stalling and reversing.
Our technical analysis of the pair suggests it is still to early to argue the uptrend is over, however other studies do see signs of weakness.
For a fundamental spin on the the outlook we have received a timely note from Lloyds Bank Commercial Banking’s Gahan Mahadevan which argues that the period of appreciation for GBP/EUR is not yet done.
Mahadevan sees more upside for the pair into 2017.
A difference in the path of interest rates, set by the central banks of the UK and Eurozone, is said to underpin the current rise in GBP/EUR.
And importantly, the divergence is tipped to extend.
UK interest rates are expected to remain broadly unchanged whilst in the Eurozone they are expected to fall, or at least remained at low levels due to the European Central Bank’s (ECB’s) policies.
The note comes as the ECB's Mario Draghi tells the European Parliament on Monday, November 28 that the ECB will do all it can to keep policy accommodative enough to boost inflation.
Thus, the Bank may announce an extension of its QE programme as early as next week’s ECB meeting while the likelihood of a similar extension to the Bank of England's QE programme remains remote at best.
This is likely to keep a cap on Euro upside and keep the Pound underpinned as the UK's interest rates advantage attracts more foreign capital which in turn strengthens the currency.
Further upside for the Pound is seen as government bond yields stay elevated as they chase US yields higher after Trump’s victory.
"We expect UK gilt yields, especially in the 5y-10y segment, to increase further over the forecast horizon, driven by higher US yields," says a note from Danske Bank backing the theme of a more robust Sterling profile.
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British Pound Jumps to 1.18 Against Euro thanks to US Dollar Surge
Pound Sterling has jumped into the new month with solid gains against the Euro and a number of other currencies as it surges in lock-step with the US Dollar.
The Pound enters December in a commanding position against the Euro as it continues to feel the benefits of rising UK Gilt yields.
The Pound has moved in tandem with the US Dollar which is up by similar margins against the Euro and other currencies on the back of rising US Treasury yields.
In short, the Trump-trade is still with us.
It was the Trump-trade - the moving higher of rising bond yields in the UK and US in anticipation of a fiscal spending spree by the new President - that has allowed Sterling to enjoy its best months trade against the Euro since 2009 having risen 4.5%.
While UK yields have risen in anticipation of higher inflation and a static Bank of England, the Euro has remained capped as Eurozone yields are kept low by the European Central Bank which continues to hoover up vast amounts of bonds.
This keeps bond prices high but yields low, and it is the yield that arguably matters from a currency perspective.
And this will in all likelihood continue to be the case in 2017 as analysts expect an extension of the ECB's quantitative easing programme to be announced by as early as December, ensuring the currency simply fails to find support from its central bank.
The Euro also suffered as investors focus on a series of looming battles between eurosceptic populists and establishment parties at the European ballot box in 2017.
"Sterling rallied against both the Euro and Dollar in month-end trade. Much of the Pound’s outperformance stemmed from strength against the Euro which spilled over and buoyed GBPUSD. Up 2 percent since Oct. 31, GBPUSD is on track for a winning month as fears of a hard Brexit, while still elevated, have diminished," says Joe Manimbo, a foreign exchange analyst at Western Union Business Solutions.
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Euro To Pound X-Rate 2016 Outlook: BoE And ECB Policy Divergence
BOE sees slow global growth, ECB likely to extend QE, how to trade the EUR/GBP. We examine the latest euro-related fx forecasts targeting the sterling and the US dollar in the short, medium and long-term GBP/EUR forex outlooks
The Bank of England said that the resilience of the UK economy will be tested following Donald Trump’s victory and the political uncertainty in Europe.
Some of the President-elect’s policies are likely to cause upheavals in global trade.
“That might not directly affect the U.K. but if it slows the pace of global growth… it’s going to have a knock-on effect though this economy,” said Mark Carney, as quoted by The Wall Street Journal.
He also warned that it is in the interests of both the UK and Europe to have a smooth transition.
“It is important to recognize the U.K. is effectively the investment banker for Europe,” he said. “It is absolutely in the interests of the EU that there is an orderly transition and there is continual access to those services.”
The Pound to Euro Exchange Rate in Sudden Reversal as US Dollar Slides
Pound Sterling surged to its best exchange rate against the Euro since September 7 on fresh Brexit developments, before staging quite a notable reversal.
GBP/EUR has given back all the gains it made on a day which saw it surge by 1% against the Dollar and Euro at one stage.
Indeed, a strong start to the new month saw GBP/EUR breach the 1.18 resistance point and take out the round target at 1.19.
At the time of writing however we are back below 1.18! A spectacular reversal.
The culprit is, we believe, the US Dollar. The US Dollar index is down by half a percent which has allowed the Euro to surge higher.
This has taken EUR/GBP alongside.
This tells us that the main game in town remains the movement of bond yields in the United States. Treasury yields are paring back and taking the Dollar alongside.
The Dollar and Pound have been tied together more or less since Trump won the November elections, and this relationship looks to be stuck fast at this stage.
hread more"The US Dollar faltered for the first time since the US Election as the rise in US interest rates starts to raise a question about future growth. The currency market is concerned about how the US economy will cope with higher interest rates. After 8 years of ultra-low interest rates, since the financial crisis, considerable excess debt will have built up in a number of companies and households," says a note from foreign exchange broker HiFX in Aukland.
Strong Gains for Pound to Euro Exchange Rate into the Weekend but ING Forecast Falls Back to 1.11
Pound Sterling retains a bullish bias thanks to the evolving Brexit story and a move to 1.20 remains on the cards but analysts at ING eye a fall back towards 1.11 over coming months.
Pound Sterling surged against the Euro on news that the UK Government would consider paying for full access to the EU's single market.
The GBP/EUR conversion achieved its best level since the start of September having hit 1.1948 at one stage.
At the time of writing the mid-market rate is at 1.1870 with retail rates being offered in the region of 1.1450 and 1.1760, depending on who your supplier is.
The news was delivered in an answer by the Brexit Secretary David Davis in the House of Commons on Thursday.
During questions in the House of Commons, Labour MP Wayne David asked if the Brexit secretary would “consider making any contribution in any shape or form for access to the single market”.
Davis said the government would look at the options during the article 50 process over the next two years.
“The major criterion here is that we get the best possible access for goods and services to the European market,” he said. “And if that is included in what he is talking about, then of course we would consider it.”
Businesses and markets will welcome any commitment on seeking full access to the single market as it removes a major layer of uncertainty that has been hanging over the whole Brexit debate for weeks.
"The remarks could be a sign that the Government still might try to avoid what is known as a hard Brexit and instead settle for a more compromising exit," says Thomas Nilsson at SEB. "The advance shows how sensitive the Pound currently is to comments regarding the future relationship the UK will have with EU."
Momentum remains positively aligned for Sterling at present and analysts at Lloyds Bank forecast the exchange rate to ultimately hit 1.20.
The gains in Sterling also come on a combination of rising UK gilt yields, a continued technical short-covering move, increased nerves over European politics.
Looking ahead Neil Wilson at ETX Capital reminds us that weekend events in Italy could be interesting, saying, "the Pound has reached its best level against the Euro since September as the clouds of uncertainty over Italy’s referendum weighs on the single currency. We could get a further fall in the Euro if Italy votes No on Sunday."
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