The Euro to Pound Sterling Exchange Rate: Forecasting Tests of 0.7748 then 0.7735

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The euro suffered an uninterrupted 5 day decline against the British pound which threatens to force a longer-term change in trend for the pair.

We have seen the EUR to GBP conversion decline for five days on the trot now, the pair was seen at 0.7966 when this week's trade got underway but is now quoted lower at 0.7811.

The pair's decline has accelerated in the wake of  the European Central Bank's (ECB) Thursday policy meeting where it was decided to keep policy unchanged.

Importantly, EUR/GBP has now fallen below the 50-day moving average at 0.7880, a level that was supposed to see increased demand for the euro and halt declines. 

A run lower towards the 100 day moving average at 0.7748 now looks like the best-bet over coming days.

That said, our studies also warn that the move down from the April highs at 0.8117 looks like a completed three-wave correction, which could also indicate the pull-back has ended and the pair may begin to move higher again.

The short to medium-term up-trend remains intact, however some analysts, such as Karen Jones at Commerzbank describe the euro's dominance as now being “exposed”.

In Jones' view the pair topped at 0.8117 and is now likely to move down to between 0.76 and 0.77:

“We view the currency pair as having topped at .8116 and expect it to decline over the next few weeks, eventually reaching the .7755/.7654 area. It is where the January high and the March low can be seen.” Said Commerzbank’s Axel Rudolph.

In CurrencyWatch's view a break below 0.7815 (around about where we are at the time of writing) would be necessary for confirmation of more downside and that the key 50-day moving average had been definitively breached.

Such a move lower would be expected to reach a target at 0.7735, where the monthly pivot is situated and certain to block more downside.

A break above the 0.7993, however, would be necessary to take a more bullish short-term view, despite the pair being in a medium-term up-trend.

Alternatively, a move above the April 18 highs at 0.7793 in line with the dominant up-trend would reinvigorate bulls, although tough resistance situated not far above at 0.8028 would probably cap gains temporarily.

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ECB Statement Impact

The pound’s appreciation versus the euro was not unexpected given the fairly pessimistic wording of the ECB statement, which signalled that low interest rates were here to stay, saying the governing council envisaged not lifting them until beyond the end date for their bond-buying programme in March 2017.

This brought into focus the continued low inflation expectations in the region, as the ECB would not say they were keeping interest rates low unless they expected inflation to remain at low levels.

In March the ECB reduced deposit rates to -0.4% meaning that banks would have to pay the ECB for looking after their money, in a complete reversal of the usual relationship where the bank pays the depositor to look after their money.

The ECB also reduced interest rates on the money it lends to banks to 0.0%, meaning they do not have to pay the ECB any interest when they borrow from them.

These policies it was hoped, would increase the volume of bank-lending into the real economy, as it would make risk-taking a more financially attractive option for banks.

Overall the ECB’s outlook for the euro-zone economy was moderately positive with steady growth observed in most key areas.

What Went Wrong for the Euro this Week?

In the Eurozone, February balance of payments data showed strong outflows from the European bond market. 

We have heard one analyst suggest that the dynamic is doing more to provide demand for other assets, rather than driving the Euro lower.

The ECB bank lending survey shows steady growth in loan demand, concentrated on the consumer and the housing market.

Corporate loan demand is quieter.

An upbeat ZEW index had no impact and the ECB council meeting succeeded only in sending the Euro sharply higher for an hour before it fell back down.

Friday saw the flash PMIs and the Euro Area composite figure came in at 53.0, from 53.1 last month.

Growth trundles on at 1-point-something.