The EUR to GBP conversion has come under fresh pressure as polls continue to solidify the Remain vote in the upcoming EU referendum while the Bank of England's Mark Carney says the next move in interest rates is up.
The pound exchange rate complex rocketed ahead following two notable developments: 1) A ORB International poll confirms the Remain vote is pulling ahead in polling ahead of the June 23rd referendum on EU membership and 2) Governor Mark Carney of the Bank of England tells the UK parliament that the next move on interest rates will be up.
ORB International reports that “Brexit is looking progressively less likely as more voters are deciding to vote Remain on June 23rd.”
When asked how they intend to vote on June 23rd, 58% answered that they would vote to remain in the EU, a clear lead over the 38% who would vote to leave. 4% remain undecided.
Of importance, there has been a notable swing amongst Conservative party voters towards the Remain vote, a trend first flagged by IPSOS Mori on the 18th May when the pound rocketed higher by over a percent against the euro. This section of the electorate had previously been assumed to be a core Leave vote.
With the UK looking set to vote to remain in Europe markets are seen to be rapidly reversing the GBP selling that characterised the November 2015 - March 2016 period.
Adding fuel to the GBP rally was the Bank of England’s Governor Mark Carney who appeared before the Financial Select Committee in the Houses of Parliament to answer questions on the Bank’s latest Inflation Report.
Carney noted he doesn't share the Treasury's views on inflation and if the U.K. votes to remain in the EU, the next move for rates should be up.
The promise of higher interest rates should attract inflows of foreign exchange for global investors hungry for returns in a low yield world.
The EUR-GBP's Technical Setup Advocated for More Losses
Those with outstanding euro into pound currency transfers are now potentially witnessing a sustained move against them.
From the highs hit above 0.80 in mid-March they will have observed the currency pair reverse and offer levels last seen in late February at 0.77.
In trying to forecast what the future holds we have consulted the underlying structure of the market for cluse.
Studies confirm a ‘head and shoulders’ (H&S) pattern has developed on the EUR to GBP conversion's daily chart, here are the potential targets to watch.
It is composed of three successive peaks, the middle one (the head) of which is taller than the other two (the shoulders).
The H&S signals a reversal of the trend from up to down, and supplies a downside target at 0.7360-75 for the euro to pound sterling exchange rate which is seen to have been under pressure for three weeks now.
The pair has broken below the ‘neckline’ situated at the lows of the H&S’s troughs, confirming the target is live.
It has moved down towards its target, but has since rotated and moved back up again.
Far from necessarily bringing into doubt the downside break, the move back up is actually a fairly common phenomenon known as a ‘return’ move.
It is a temporary pull-back before the down-trend resumes.
Commerzbank see a bounce to 0.7781 as possible before the ‘next leg down’.
“EUR/GBP last week completed a head and shoulders pattern and is has sold off to .7654, the March low. This has held the initial test and we would allow for ma return to point of break out i.e. a bounce to the .7781 neckline ahead of the next leg down. The head and shoulders top offers a downside measured target to .7360.”
Whilst we concur with Commerzbank’s broad reading, we see a safer target situated at the 200-day moving average at 0.7520.
The driver for more downside could come from diminishing Brexit fears. Recent polls have already shown a shift in favour of voting to stay and if this continues it will likely lead to an even stronger recovery in the pound, and therefore more downside for EUR/GBP.
A substantial move in sterling, whilst possible before the actual referendum itself, is more probable once the actual vote has returned a verdict, as this will eliminate all remaining uncertainty.
Another source of upside for sterling could come from heightened expectations of the Bank of England (BOE) raising interest rates sooner than currently expected. This would require more positive economic data, which could come in the form of first quarter GDP data out this Friday (May 27).
The data is a second estimate following the preliminary 0.4% result already released.
That result was in line with expectations but relatively compared to the euro-zone’s 0.6%. If the second estimate improves on it then it could support sterling; the euro meanwhile was put under pressure after its second estimate fell to 0.5%.
According to Citi, fragile Eurozone banks may be a risk factor for the euro, as they are likely to stymie transmission of the European Central Bank’s (ECB’s) hefty stimulus programme, to the wider economy.
Counter-balancing this negative for them, however, is the region’s high current account surplus, which is a sign the euro is a supported by net positive inflows.
Inflation has shown a -0.2% drop two months running, and although the ECB warned this might be the case before a pick-up in H2 because of the lag in in the impact of cheap energy, signs the underlying economy is slowing, such as were supplied by inadequate PMI data this morning, could stoke fears deflation may also be resulting from slower demand, and not just due to oil.
Aggressive GBP Buying Seen, Hedge Funds and Asset Managers Lead the Charge
Latest data concerning the flows of foreign currency shows the British pound has been subject to ‘aggressive’ buying.
UBS report that sterling recording its strongest net inflow in more than three years during the week end 19th of May.
“Around half of GBP net inflows came on Wednesday, as some EU referendum polls showed signals in favour of the remain campaign and GBPUSD rallied two big figures as market expectations shifted,” says Jeremy Chandler, a strategist with UBS Global Research.
“Asset managers and hedge funds were strong GBPUSD buyers, largely accounting for the entire flow, while corporates and private clients showed little directionality,” says Chandler.
EURGBP was sold on the whole, with hedge funds and asset managers again leading the GBP inflows
The surge in demand saw many GBP currency pairs looking overbought and prone to a correction.