The EUR to GBP exchange rate is at a cross-roads having recovered a good portion of its April losses leaving anlaysts split over the currency pair's next move.
The euro to pound exchange rate has settled around 0.7891 having pulled back a key 50% of the previous fall from the 0.8119 high registered in early April.
It is often the case that prices rotate when they retrace 50% of the previous rally or down-trend.
This could, therefore, mark a turning point for the pair, with the possibility of a rotation occurring at the current level and the pair resuming its descent.
Currently there are insufficient signs yet that this might be happening, so the pair could also simply continue rising back up towards the 0.81 highs.
According to Karen Jones, a technical analyst with Commerzbank, the pair has probably already topped and the pull-back to the 50% could therefore be a prime opportunity to sell the rally.
"We view the currency pair as having topped at .8116 and look for further slippage to the .7654 area. It is where the March low can be seen."
The line in the sand is 0.7992 for Commerzbank, above which they would begin to get bullish again, but whilst still below, they would maintain a bearish bias.
They are currently short with recommendation to cover at 0.7680.
Lloyds Commercial Banking’s Robin Wilkins questions his previously bearish stance now that the 0.7750s have held:
"Prices have extended recent gains, after holding the key 0.7750/30 support region. This price action calls into question whether 0.8117 was a significant top."
He now requires a break below the 0.7750s and 0.7650s before expecting a resumption of the down-trend:
“An immediate decline back through 0.7850/40 and then 0.7750 would confirm it was. Until then we are now watching how price action develops.”
Longer-term Wilkins is bearish:
“We still believe that while under the 0.8160 region the probabilities are for a move back towards 0.75-0.73 in the medium to long-term. A break of 0.8160 would negate that view, with 0.8370/80.”
British Pound Seen Losing Impetus on Economic Data
It has not been a good week for sterling on the economics front.
The British pound remains under pressure after the third PMI this week came in below consensus forecasts.
The PMI for the U.K.’s dominant services sector coming in well below even the lowest forecast implies a very weak Q2 growth rate and highlights the impact that Brexit uncertainty is having on the U.K.’s economy.
This follows the poor Manufacturing and Construction PMI’s which have both undershot expectations.
Construction fell to 52.0 when it had been forecast to rise to 54.2 in April; Manufacturing fell to 49.2, which is in contraction territory.
“Expect discussion of Q2 GDP growth decelerating to around 0.2% to take hold. The PMI undershoot will see the UK economic surprise index heading lower, encouraging GBP-USD back towards 1.4405. For EUR-GBP look for a test towards 0.7950/60, although we would expect to run into some selling interest at such levels,” says Jeremy Stretch at CIBC Markets.
Stretch is not exactly bullish the euro either, questioning the previously upbeat interpretations of Eurozone growth following the 0.6% rise in GDP in Q1 - and implying any rises in EUR/GBP may be measured at best:
“Although Eurozone composite PMI remained in line with the 53.0 flash estimate the rate of activity remains lacklustre at best; the three month trend has decelerated to the lowest rate in fourteen months. The deceleration in composite activity comes against retail sales across the eurozone falling at the fastest pace since September ’14.”
The fall in retail sales is particularly concerning, according to Stretch:
“The 0.5% decline in March has seen annual sales growth retreat to a five month low, underlining that consumers maintain a reluctance to spend. The hesitancy to spend is particularly notable in Germany where sales declined 1.1% in the month, this of course comes in the wake of the implicit criticism by ECB President Draghi regarding the maintenance of an exaggerated German trade surplus, via a lack of domestic consumption.”