Why Pound to Euro Exchange Rate Could be Headed Back to 1.13

british pound 2

The GBP/EUR exchange rate has fallen from highs of 1.32 down to 1.2870 in the space of 48 hours confirming a sudden reversal in sentiment towards the UK unit.

  • Pound to euro exchange rate today = 1.2897
  • Pound to dollar exchange rate today = 1.4449

Pound sterling has crashed through the support floors at 1.30 and 1.29 without batting an eyelid as the currency market focusses on the referendum due in 23 days time.

More polls are showing a majority for the “remainers” but the numbers are far from overwhelming with a shift towards Leave noted in a number of polls released this week.

The shift has served as a reminder to markets that there is notable event risk ahead, and caution is warranted. There is therefore a lingering feeling that the May rally in sterling could have been overdone.

"We were a bit surprised by the large strengthening of the GBP and on the same note, exceptionally low odds for the UK to stay inthe EU (William Hill 1.20). The actual result is still almost a month away and there are manythings that can happen. We believe the GBP has recoiled too much and we do not recommend long positions now," says Pierre Carlsson at Handelsbanken Capital Markets.

Forecasting a Potential 1.13 in GBP/EUR

Despite recent declines, GBP/EUR’s medium-term momentum is still oriented upwards despite the ongoing retracement lower argues Yann Quelenn at Swissquote Bank.

Hourly support can be found at 1.2897 (23/05/2016 low) while hourly resistance can be found at 1.3219 (25/05/2016 high) and Quelenn says we should expect the pair to show further consolidation.

If we take a further step back it is argued that the pair is still seen to be retracing from recent highs made in 2015.

In the longer-term timeframe Quelenn argues that the technical structure suggests a growing downside momentum. The pair is trading well below its 200 DMA.

Strong support is however noted by the Swissquote analyst at 1.1344 (25/02/2013 low) - we would only really expect this level to be considered should the UK vote to leave the European Union in June as a notable fundamental trigger would be required for the move.

Pound Stung by Polling Data

No prizes for those who can guess what really matters for the pound.

GBP has been stung by the latest round of polling ahead of the EU referendum.

Both ICM and ORB International have today reported a sharp swing back towards the Leave campaign.

We note that the issue of migration has risen up the news agenda over recent days, and with immigration being such a sensitive issue to Britons, it is hardly surprising that the swing to Stay that we saw over recent weeks has peaked.

“It appears that the recent focus on immigration has boosted the out campaign,” says analyst Jeremy Stretch at CIBC Markets, “while the telephone based poll underlines a continued lead for the remain camp the narrowing differential could be cause for concern were that to extend.”

Should the exit campaign continue to generate poll traction and economic data remains soft those watching GBP should consider the recent GBP “short covering” spree to have ended.

The message we would convey to those looking to purchase euros with sterling is one of caution. 

Technical indicators are turning more negative and I suspect we may well have seen GBP's best levels pass and the next time we revisit levels towards 1.32 could well be after the referendum on June 23rd.

Until then, expect nerves to keep GBP subdued, the big question that will concern us going forward regards just how low the exchange rate will go.

Manufacturing PMI Data Unable to Aid the British Pound to Euro Rate Today

Markets gave the middle finger to Manufacturing PMI data that showed the sector is growing once more following recent contraction.

The pound was sold agressively despite the PMI reading of 50.1 in May, up on the 49.4 noted in April, economists had forecast 49.6.

To be fair, only a really strong outcome would have likely benefited GBP as the underlying sentiment betrayed by the report remains negative. "Any small pockets of new work, were firmly in the driving hands of the domestic market as exports remained lacklustre, affected by the slowdown in global economic growth," says David Noble at the Chartered Institute of Procurement & Supply.

Manufacturing job losses were registered for the fifth straight month in May. However, the rate of reduction eased to a three-month low and was only modest overall.

UBS Flow Data: GBP Bought, EUR Sold

Latest currency flow data from UBS shows that over the past week the euro’s weakness was reflected in net EUR selling following three weeks of inflows.

GBP continued to be bought, though not by as much as the previous week.

“After last week's activity, sterling had a relatively quiet week, flat against the dollar and modestly bought against the euro. GBPUSD saw mild demand from all client categories apart from private clients, who were net sellers. Asset managers led the outflows in EURGBP, with limited directionality expressed by other client categories,” says Jeremy Chandler, Strategist at UBS.

More Euro Gains Ahead Argue Deutsche Bank

The rally in the euro to pound exchange rate since the start of June (EUR/GBP) has been large, but a new strategic forecast advocated by Deutsche Bank suggests there is still more strength to follow if they are correct.

“The market looks to have unwound a significant amount of, if not all, UK EU referendum risk premia according to the Bank of England’s analysis, with 89 on the broad GBP TWI consistent with pre-referendum fair value, yet polling remains volatile and questions remain about their accuracy,” say Deutsche Bank in a strategy note to clients.

Also, above this level, the BoE are likely to turn more dovish.

A second argument forwarded is that positioning has significantly reduced.

“The most recent IMM report shows that leveraged fund positioning is back to flat and last week’s CORAX showed large paring of GBP shorts,” say Deutsche Bank.

What does this mean?

In short, markets are no longer as heavily biased against the pound as they were in the opening months of 2016. When markets are all betting the same way often what happens is the move slows and finds it increasingly hard to find traction.     

When positioning is ‘flat’ this tells us markets are neither biased long or short, therefore when a directional move is triggered there are a great number of market participants who can join the move and increase its momentum.   

“Third, being short GBP would take advantage of a less risk positive environment on renewed USD/CNH appreciation and a more hawkish Fed. The correlation between EUR/GBP and equities has dropped to record lows,” say DB.

The trade: Enter @ 0.7630, stop @ 0.7490, target @ 0.7850.