The GBP to EUR conversion is destined to hit fresh 2016 lows according to our technical studies while fundamentals also suggest Pound Sterling is likely to retain a soft under-belly.
- The Pound to Euro rate today (28-9-16): 1.1626, click here for live rate
- The Euro to Pound Sterling rate today: 0.8601, click here for live rate
The pound to euro rate remains prone to the whims of investor sentiment on global markets.
When markets are rising, Sterling finds support but when markets fall the UK currency tends to fall.
"With risk aversion again on the rise, Sterling performs negatively during episodes of risk aversion due to its reliance upon foreign capital, the position reduction has allowed room for net GBP shorts to be rebuilt," says Jeremy Stretch at CIBC Markets.
Sterling has struggled this week with markets falling into the red on news Germany's troubled Deutsche Bank would not be able to count on the government for any potential bailout in the future.
"Heavy losses for Deutsche Bank took a toll on European markets and this spilled over to the US financial sector. The question is whether the bank will have to raise capital to strengthen its finances and there were indications this weekend that Angela Merkel would not support state aid," says Andreas Johnson at SEB Research & Strategy.
For the remainder of the month we will be watching global themes to explain Sterling's performance with the only real economic data out of the UK economy only due out on Monday the 3rd October.
If markets can maintain some positive momentum until then then the Pound may be able to avoid setting fresh 2016 lows over coming days.
Technical Studies Forecast GBP/EUR to Move Towards 1.13
However, from a technical perspective we read further losses are likely.
The recent declines bring into doubt the possibility that the condensed price action seen since July could be a bullish reversal pattern.
We had been open to the idea that an inverse head and shoulders pattern was forming on the charts; this would have suggested an imminent reversal of the current down-trend:
It would take a break below the 1.1459 lows, however, to completely dismiss the possibility of a reversal and confirm a much more bearish outlook for the pair.
Currently the exchange rate will probably move down to support from the S1 monthly pivot at 1.1491 and the August lows at 1.1459.
Ideally we would be looking for a clear break below 1.1430 to provide adequate confirmation of a clear break lower and more downside for the pair.
Such a move would be expected to probably reach a target at 1.1300.
Euro Exchange Rates Boosted by Ifo Data
The single currency has been tee'd off quite nicely by news the German Ifo Business Climate has risen faster than economists had forecast.
The Ifo Business Climate Index is a highly-regarded early indicator of economic developments in Germany published on a monthly basis and therefore is much-anticipated by Euro traders.
Data came in quite a bit stronger than expected, with the headline rising from 106.3 to 109.5 (analysts were expecting a reading of 106.3).
The bigger driver of the upside surprise being expectations (104.5 vs mkt 100.1) moreso than the current assessment (114.7 vs mkt 112.9).
"Alongside the better manufacturing PMI on Friday, it looks like German growth momentum may be picking up into Q4, after Q3 started off on very soft footing," say TD Securities in a note to clients.