The Pound to Euro exchange rate is seen 0.15% higher at 1.1388 on Thursday, June 15.
This represents a recovery from the multi-week low set at 1.1278 recorded at the start of the week. It also represents a stroke of great strategic forecasting by the team at Westpac Bank in Sydney.
Strategists announced at the start of the week they are looking to bet on a rebound in the Pound against the Euro; but just how far can the move extend?
The call is counter to an ongoing trend that has seen the Euro dominate its main rivals in 2017 with the pattern continuing last week against Sterling following the General Election result that delivered an added dose of political uncertainty.
The British Pound has actually posted a sixth consecutive weekly loss relative to the single currency.
Analyst Bill McNamara at Charles Stanley says the hefty selling pressure has left GBP/EUR looking relatively oversold – its 14-day RSI has slumped to a reading of 34% - but it is still not at all clear that the bottom is in.
Those who believe the trend will continue to delivering further gains for the Euro and losses for the Pound will of course stick with this well-established trend.
Indeed at the start of this week we confirmed Societe Generale are looking for the trend to extend; they are just one amongst a large group of foreign exchange strategists looking for GBP/EUR to move lower.
However - there are contrarians out there - and amongst them are the team at Westpac Institutional Bank in Sydney.
Rationale for Expecting Euro Weakness:
- EUR has gained persistently positive information and data over recent months, culminating in an extraordinary performance for Macron’s REM in the first round of French Assembly elections and a slide in support for Euro-sceptic 5-Star movement in the first round of Italian regional elections
- Although regional surveys remain at multi-year highs, the most recent data have started to moderate, especially outside of Germany, including ZEW expectations
- New EU data is relatively light this week, with ZEW surveys the only new information beyond final May CPI and industrial production and amalgamated trade data
- A protracted Brexit negotiation is not positive for either EU-27 or UK and the outperformance of regional stock markets suggests a fully priced market
- IMM Non-commercial EUR longs (74k) are now at or nearing the peaks seen in both 2011 and 2013 (the net-leveraged sub-group is now square EUR)
Rationale for Betting on a British Pound Recovery
- GBP has been sold on the back of the increased political uncertainty generated by the weakened Conservative govt. after last week's election as well as post-election surveys of uncertainty
- The Bank of England is likely to continue its highly accommodative policies when it meets this week, but the context of a resilient economy will continue and a likely point of discussion within the MPC and the threshold for withdrawing accommodation is relatively low according to recent minutes
- Both housing and inflation data this week surprised on the upside and will pressure the covering of GBP shorts if BoE maintain a more balanced stance
- Govt./DUP agreement is likely soon together with the likelihood of more business friendly Brexit negotiations and a dropping of contentious manifesto initiatives
What does the Trade Look Like?
Westpac are looking to sell EUR/GBP at 0.8810 with a stop placed at 0.8870, they are targeting a fall to 0.8665.
Note that the stop moves should the trade reach a 1% gain.
Looking at this from a Pound into Euro perspective, this would be a sell on GBP/EUR at 1.1351, with a stop-loss set at 1.1274 and a target at 1.1541.
These levels are all quite within recent ranges so this appears to be a call set on a short duration.
Bank of England in Focus
Near-term risks to Sterling will be posed by the Bank of England who deliver their latest policy meeting on Thursday, June 15.
Our latest analysis of how the Bank will impact Sterling direction over coming months shows the risks are skewed lower with one analyst saying they expect the central bank to cut interest rates in 2018.
No move on rates is expected at the June meeting, but minutes to the meeting should give us a hint of where the Bank is leaning.
Our Technical Analysis Suggests a Bottom Might be Forming
The GBP to EUR conversion isn’t exactly screaming to go lower.
This is the main finding of our latest technical assessment of the exchange rate as we move through the mid-week session.
The main problem for bears is the double layer (black and blue lines) of support in the 1.1280s composed of the bottom of a long-term range and the S2 monthly pivot, a line traders use to trade counter to the dominant trend, which in this case is down:
These two levels are acting as a rally call to bulls to try to push the pair back up and this heavy buying will make it difficult for the exchange rate to break lower.
Another sign the down-move may be exhausted is it’s clear 5-wave Elliot Wave structure.
Elliot Wave theory says that the market moves in discrete 5-wave patterns up and down (it’s more complicated than that but we can’t go into it here), which suggests the move down from the April 18 highs could be a completed downcycle.
The MACD momentum indicator also looks like it is bottoming.
The last few days have witnessed a bounce, and yet despite this, the bounce has not been strong enough to convince us that it is the start of something bigger.
Ultimately, despite misgivings about the downtrend’s sustainability we must stick with our bearish forecast as there is insufficient evidence to the contrary.
A break below the double layer of support in the 1.1280’s signalled by a break below 1.1260 would provide the confirmation for a continuation to 1.1200 and then 1.1100 round-number support.
Going in the Other Direction: Bet on the Euro Longer-Term
Others in the analyst community are however not convinced Sterling's prospects are bright.
Foreign exchange strategists at Société Générale have confirmed they are expecting further depreciation in the value of Pound Sterling relative to the Euro.
The call comes as the French investment bank release their mid-year review of global foreign exchange markets and accompanying forecasts.
The US Dollar is seen to have reached a peak after years of climbing, and should start to fade.
However, the British Pound is also tipped to struggle with analysts envisaging declines coming against a resurgent Euro.
The Pound does look cheap at current levels but Societe Generale says that does not suggest it cannot get cheaper.
“GBP is cheap relative to the dollar on the basis of purchasing power parity, albeit for very good reason,” say Soc Gen. “However, it isn’t noticeably cheap relative to the EUR or any of its other satellite currencies (the SEK, PLN and HUF stand out). Brexit negotiations will add to policy uncertainty.”
Societe Generale are forecasting the EUR/GBP exchange rate to trade at 0.92 by the end of 2017 and it should remain at this level by June 2018.
From a Pound to Euro exchange rate this equates to GBP/EUR at 1.0870.