The EUR to GBP conversion has moved lower having hit a key resistance point but we hear from strategists at Deutsche Bank that the pair should still rise towards 0.78.
- Euro to pound rate today = 0.7733
- ECB fails to boost the euro, despite raising inflation forecasts
- Head and Shoulders pattern seen halting currency pair's advance
- But, Lloyds eyeing out a test of 0.80+
The EUR to GBP exchange rate has bounced off recent lows at 0.76 and recovered to 0.7733.
However, a general recovery in sterling, combined with a lacklustre European Central Bank policy meeting on Thursday the 2nd of June have conspired to halt advances.
However, the euro's recovery against the pound sterling is not yet over warn analysts at Deutsche Bank and Lloyds Commercial Bank.
Deutsche Bank have cited three reasons as to why we should expect the move higher to extend.
“First, 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.
Lloyds Forecasting 0.82 and Above
A strong bull day, after continuing to hold channel support in the 0.7560/55 region.
"Short-term mechanical studies remain positive and as such while over support in the 0.7655/45 region we can see a push towards more important Fibonacci and channel resistance in the 0.7750-0.7805 region," say Lloyds Commercial Banking in a brief to clients.
A drop back through 0.7655/45 would likely see a re-test of the channel supports.
Longer-term Lloyds have cited 0.81-0.82 as a major resistance region and price action continues to suggest 0.8117 was a top for a move back towards 0.73-0.72. Further confirmation would come from a break through the 0.7500/0.7450 range highs of last year.
"A rally back through 0.7750/0.7800 would negate this outlook and suggest the declines were just corrective for a re-test of 0.82, with a break there risking follow-through to the next levels at 0.8370/80 and possibly 0.8700/20," say Lloyds.
The Argument for EUR/GBP Losses: Gains Capped by a Descending Trendline
If further advances in EUR/GBP are to be realised then a downward sloping trendline, that has capped euro advances since April, must be overcome:
What the above chart tells us is that there is a heavy supply of euros and demand for sterling at levels defined by the downward sloping line.
Presumably traders are setting sell orders on EUR/GBP around this level having noted it to be an instructive guide on future price action.
Furthermore, we are in the vicinity of the neckline of a head and shoulders (H&S) topping pattern, which formed during the start of 2016, and this will probably check its advance as it will concentrate bearish resistance.
Head and shoulders are formed of three consecutive peaks, the middle one of which is taller than the other two.
At the level connecting the intervening troughs is the neckline, which when breached gives the final confirmation the market is breaking lower.
A break back above the neckline, however, and the key 0.7758 highs, would negate the bearish potential of the H&S, and instead provide bullish confirmation that the trend had potentially turned up.
Until then the trend remains down and likely to extend eventually, with a break below the 0.7562 lows confirming more downside towards a target at the 200-day moving average (MA), situated at 0.7531. The eventual target generated by the H&S is even lower at 0.7363.
Analyst Karen Jones, at banking giant Commerzbank, is similarly bearish longer-term, also as a result of the head and shoulders pattern on the daily chart:
“Beyond a small bounce, we are negative. The market has recently completed a head and shoulders top, which offers a downside measured target to .7360.
"The market remains directly offered below the .7753 23rd May high. The short term downtrend at .7815 maintains near term downside pressure,” says Jones.