Those looking to buy euros with their British pounds (GBP) will be witnessing a welcome relief-rally in the exchange rate on June 7th thanks to the solid support found at the early May lows and, importantly, a couple of fresh polls that give the upcoming EU referendum to the Remain vote.
- Danske Bank research suggests GBP/EUR is likely to trade at 1.3245-1.2853 following the EU referendum (in the event of a remain vote).
- Latest polls show Remain has the edge, sees sterling rally
- GBP/EUR bought just ahead of May congestion area, could contain further declines
The pound to euro exchange rate conversion has rallied to 1.2755 having plugged lows towards 1.2648 over the course of the previous 24 hours.
Why the recovery? On the fundamental front, all that matters for the British pound between now and June 23rd are EU referendum polls.
Sterling has recovered some of its recent losses as two fresh polls - one from YouGov and one from ORB International - show a lead for the Remain vote, breaking a brace of pro-Leave poll results that shook the foreign exchange markets.
In the YouGov poll for the Times, the Remain vote gained 2% to reach 43%, Leave fell 42%.
The ORB International telephone poll for the Telegraph shows support for Remain in the bloc fell but retains a one point lead over those wishing to leave the EU, smaller than the five-point difference in the pollster's previous survey published on May 30.
The data confirms no side is likely to retain an outright advantage ahead of the EU referendum and as such moves in sterling are ultimately likely to be contained.
The latest poll-of-polls compilation shows Leave on 51% and Remain on 49%.
Demand for Sterling Seen Just Above Key Support Levels
From a technical perspective, the GBP has found buying support having fallen into the region of 1.26-1.2750:
As can be seen from above this is a congestion zone that the market often gets caught in as buyers and sellers tend to match each other.
There could well be enough buying interest in sterling at these levels to ensure declines are arrested in the short-term.
Of course it is worth pointing out that the breadth of the support zone encompasses about 150 pips, but in the context of recent declines moves contained to such a range constitute mere child's play.
Should the pound break below this congestion zone then we would expect a rapid drop towards the 2016 lows at 1.2350.
British Pound Volatility Spikes
Looking ahead, the only thing we can guarantee is more volatility for the British pound, and polls will be driving much of the moves.
Momentum towards a Leave vote has been growing and we saw fresh falls at the start of the weekon the latest fortnightly Opinium/Observer poll which showed those in favour of Leaving now stand on 43% with 40% saying they will vote to Remain.
This is an about-turn on their previous poll - published May 21 - that showed remain four points ahead on 44%, with leave on 40% and 14% undecided.
This poll has been followed up on Monday morning by the release of a YouGov online poll of 3,495 people for ITV's Good Morning Britain showed 45 percent would opt to leave the EU while 41 percent would opt to stay while 11 percent of voters were undecided.
A TNS online poll of 1,213 people showed 43 percent would vote to leave, 41 percent would vote to stay and 16 percent were undecided.
"Dropping nearly 1% against the dollar and the euro the currency is continuing to feel the ragged toing and froing of the duelling EU referendum campaigns. The most recent downward movement was sparked by a series of polls over the weekend that suggest the Brexiters have gained ground as immigration has come into focus, reintroducing a wave of uncertainty that appeared to have been put to bed in light of the 13-point lead Vote Remain had around a fortnight ago," says Connor Campbell at Spreadex in London.
The pound rose between early April and end of May 2016 and the reason was clear - the Remain campaign was seen opening up a strong advantage over the Leave campaign in the battle for the outcome of the June 23rd EU referendum.
However, since the start of June this advantage has been whittled away with the gap closing to a 50/50 split in the week ended 3rd June.
Sterling has fallen accordingly:
There is still more than enough margin for error in the Brexit opinion polls to leave plenty of doubt for FX traders to thrive on.
"I would not be at all surprised to see a 1.37/1.47 or 1.40/1.50 type range in the cable over the next few weeks. It won’t be about being right or wrong, but will be all about getting the market timing and position sizing absolutely perfect. In the very short-term. we should see support/resistance levels emerge at 1.4385/1.4585," says Sean Lee, a professional trader at Forextell.
However, if Lee had to have a medium-term position, he advises he would prefer to be long EUR/GBP.
A Big Recovery Once The Air is Cleared?
The short-term outlook is certainly biased to the downside, but casting our eyes to the horizon how might the pound fare over post-referendum?
Should Brexit occur then anything is possible with a number of big-name analysts saying parity in GBP to EUR could well take place.
However, this is not the base case scenario we, the bookies nor the big institutional researchers envisage.
Therefore, figuring out how the pound will react to a Remain victory should be held as being the most pertinent puzzle.
We note that the euro is trading well above where it should be against pound sterling - this is based on the observation that the exchange rate historically follows the difference in interest rates between the UK and Eurozone.
As such, analysts tend to use this guide to gauge where fair-value on the currency pair lies.
What the below suggests is that the euro is trading well above fair value - and most analysts suggest this gap can be blamed on Brexit fears.
With bookmakers continuing to only ascribe a 30% chance of the UK leaving the EU we will join those who assume Remain will win despite a recent increase in the odds of an exit:
Should Remain win then we will likely witness a rapid closing of the gap between the GBP/EUR and fair value - i.e expect a sharp rally.
According to Danske Bank’s Brexit risk premium estimates, 1.25pp is currently priced in the GBP/EUR spot rate (two standard deviations confidence interval of 0 to +2.5pp).
This implies that GBP/EUR is likely to trade at 1.3245-1.2853 post the election in the event of a remain vote.
Those with currency decisions spanning a few months should therefore look through the current short-term noise and be aware that the outlook for sterling remains constructive.
"The outlook for the GBP is positive and, with sizeable short GBP positioning, we think risks are skewed to the upside. We expect the BoE to start its tightening cycle in Q2 2017," say BNP Paribas in a global forecast note released at the start of June.
We would read between the lines and assume that BNP are also operating from a base-case scenario that sees the UK voting to remain a member of the European Union.
Analysts point out the UK’s balance of payments position is solid, with the current account deficit financed by FDI and portfolio investment inflows.
However, with taking a specific look at the GBP/EUR, BNP are also positive on the euro's prospects.
"We think EURUSD could rally to 1.16 by mid-year, despite the ECB delivering a significant set of easing measures," say BNP, "a fragile risk environment is likely to deter eurozone outflows, leaving the EUR supported by its current account surplus."
Nevertheless, the pound is forecast to gain an edge and end the year at 1.3888 against the euro.
In euro to pound sterling exchange rate terms this equates to 0.72.
Therefore, if you have the luxury of waiting we would suggest you get in touch with your trader and order them to set buy orders to just below 1.38 ahead of a potential spike.