The EUR to GBP conversion is now at its lowest level since February but we see signs that bargain hunters are stepping into the market to help support the currency as it appears oversold.
- Euro to pound exchange rate = 0.7667 (recovering from day's low at 0.7649)
- Pound to euro exchange rate today = 1.3042
The pound sterling's period of appreciation continues on Thursday the 19th as retail sales data confirms the UK economy may not be slowing down as fast as many had previously assumed.
The EUR/GBP fell to levels last seen in March on news retail sales rose 1.3% in April, ahead of forecasts for 0.5%. The previous month's release saw a decline of -0.5%.
"After shoppers stayed away from the high street in March, Mark Carney and his BoE colleagues will be delighted to see that retail sales figures have rebounded strongly in April," says Dennis de Jong at UFX.com.
The figure may have been even higher if it wasn’t for a weak set of results coming out of Scotland.
"A steep drop in non-food sales, particularly clothing and footwear, north of the border has seen the worst year-on-year decline in retail sales since 2008," notes de Jong.
Concerning the outlook, it appears that the euro could soon be about to find some support from bargain hunters and speculators looking to bet against the pound's now overbought conditions.
"The market has dropped sharply through 0.7750, and is already close to reaching the next area of support in the 0.7665/25 zone. Momentum remains down, so we can see a further push towards the lower end of that range support before potentially finding stability and moving into another consolidation phase," says Robin Wilkin, a technical strategist with Lloyds Bank.
However, expect any gains to be capped by 0.7800/30 which is now intra-day resistance.
A successful move back through here neutralises the current downside momentum and suggesting a broader upper range is still in play.
"Longer-term we have cited 0.81-0.82 as a major resistance region and we are looking for evidence that 0.8117 was a top for a move back towards 0.75-0.73. The breakdown through 0.7750 increases the chances it was a significant top, but we have to be cognisant of event risk too," says Wilkin.
Pound Now Overbought
The break-neck pace of declines seen in the GBP complex of late has many wondering if the advance is overdone.
A sequence of polls indicating a sizable lead for the Remain campaign has seen GBP trade with a renewed sense of optimism that a Brexit will be evaded.
"While our house view remains that the outcome may prove to be somewhat closer than what the latest polls/betting odds are saying, we also take stock of the fact that the latest GBP reprieve has likely exceeded fundamentals," says Viraj Patel at ING.
ING cite signs of a mispricing have been particularly evident in GBP/USD; the 2Y UK-US swap rate differential has widen by around 18bps since the start of the month, while cable is now back above the 1.45 level.
Pound Roars Ahead on EU Polling Data
The pound's gains against the euro come hot on the heels of the +1.25% advance seen on Wednesday.
The EUR has sold off heavily against the pound over the course of the past 24 hours and confirms our initial assessment ahead of the declines that the market had turned notably bearish.
A surge in the GBP exchange rate complex was seen following the release of the latest Ipsos Moril survey on voting intentions ahead of the EU referendum.
Markets have long been buying euros and selling the British pound on anticipation of a close outcome at the June referendum.
The latest polling data suggests Remain should carry the day and markets are frantically trying to regain lost ground and price sterling at a value that better reflects the underlying fundamentals in the UK economy.
“After sitting all week just below the .7930/45 highs seen in February and March the market has finally failed and we suspect is developing a potential head and shoulders pattern. This will only be confirmed on a close below the neckline at .7773. Failure here should trigger losses to the .7740 April low and .7654, the March low,” says Commerzbank’s Karen Jones in her latest forecast note on the pair.
The neckline has now been breached and Jones’s first target at 0.7740 met, however, there is still potential for further downside to the next target at the March lows, at 0.7654.
Head and shoulders patterns (H&Ss) form after an extended up-trend, and are a sign that the trend is coming to an end, and that there is about to be a bearish reversal.
They are formed of three consecutive peaks, the middle peak of which (the head) being slightly higher than the other two peaks either side (the shoulders).
The neckline is the line which connects the bottom of the three peaks – literally at the level of the ‘neck’ on the H&S. It needs to be breached to confirm the head and shoulders has finished and is breaking lower. This is also the sign the trend has changed.
A break to the downside is normally expected to extend as far as 100% of the height of the head, extrapolated down from the neckline, although a safe minimum expectation is for it to reach 61.8% of the height of the head extrapolated down.
On the head and shoulders on EUR/GBP this produces a minimum target at 0.7523 (61.8% of the height of the head).
Another valid target lies at the 200-day moving average at 0.7508, and 0.7671 where the S1 monthly pivot rests.