Volatility in the EUR to GBP exchange rate has spiked to levels last seen during the 2008 financial crisis as corporate Britain races to buy currency protection ahead of a potential UK exit from the European Union on June 23rd.
The EUR/GBP continues to trade within reach of the multi-week best it achieved above 0.79 at the start of the week.
Expect consolidation to be the buzzword on this pair for the near-term, but ultimately we expect the uptrend to extend.
The big news on this market does however remain the unprecedented volatility that is seen bucking the market with corporates racing to buy out currency hedges in order to protect against any potential negatives that would stem from a Leave vote carrying the day.
The hedging has been recorded by the Bank of England whose latest data suggests some £77bn left the sterling system.
"The apparently large flows mostly reflected the clients of British banks taking out insurance against a large drop in sterling," says Chris Giles of the Financial Times.
This observation is confirmed by East & Partners whose research shows that over half (53.4 percent) of all companies have hedged against FX exposures, including over a fifth (21.6 percent) of SMEs.
All this hedging demand has made for an incredibly volatile options market that could well boil over into the spot market which we are more familiar with.
"EUR/GBP 1-month implied volatility skyrocketed this week, being not far away from their all-time highs seen in the 2008 financial crisis – evidence of a very high degree of uncertainty and looming risks," says Petr Krpata at ING in London.
As a sign of just how difficult the market has become we note an incredible 200 pip spike in sterling in Asian trade, at a time when volumes were thin.
Many traders have attributed it to a 'fat finger' - regardless, this is imporant as the impact spread to other major pairs, such as EUR/GBP.
Volatility aside, momentum favours the euro against the pound after a sharp fall in sterling witnessed at the start of the week.
"EUR/GBP has eroded the short term downtrend at 0.7791 and its 55 day moving average. This has been enough to negate the head and shoulders top," notes Karen Jones at Commerzbank.
The head and shoulders top Jones refers to is a negative technical event that has been dominating the charts for days now and analysts had been backing the euro to actually fall against sterling as a result of the formation.
This negative has now been cleared from the market and could allow the euro to break yet higher.
Note that the euro has broken above a descending trendline, in place since early April. Markets had used the line as a guide for deciding on when to sell any euro strength.
The normal way to calculate the length of a move following a trend-line break is by extrapolating the length of the move prior to the break, higher, at the point of the break, which in this case forecasts a continuation up to 0.8000.
In GBP to EUR terms this equates to a decline to 1.25.
Two major obstacles sit in the way of the pair meeting its target: the 50-month moving average (MAV) at 0.7916, and the 200-day MAV situated at 0.7930.
Lloyds Commercial banking's Robin Wilkins also highlights a similar resistance zone, in this morning's FXpresso:
"Our focus of attention is on the 0.7920/40 region. A move up through this resistance region would suggest the declines from 0.8117 to 0.7610 are just another correction phase and risk a re-test of the 0.8200 region. Longer-term we have cited this as a major resistance region."
The pair will probably break above these levels, however, and eventually reach 0.8000.
The Bank of America View: Long-Term EUR/GBP Rally Still Intact
The pound to euro exchange rate (GBP/EUR) is seen residing between two crucial markets while the GBP/USD cannot afford to close this quarter below a magic number argue technical strategists at Bank of America Merrill Lynch Global Research.
While this driver will be key those with an interest in the market are advised to keep a close eye on the relevant levels in the various sterling pairs.
This will allow for the accurate planning of your impending payment requirements.
For the sake of analysis, the pair is approached from the EUR/GBP angle, but we do also convert the levels around so you can get a feel if you are looking at the market from the other angle.
“EUR/GBP uptrend is still technically intact; however there are some clearly defined technical levels to be aware of. Support at .74725 - .7500 and resistance at .79290, .80974 and .83730,” says BofA’s Technical Strategist Paul Ciana.
Inverted, this suggests the GBP/EUR downtrend remains technically intact, with resistance at 1.3382 - 1.33. Support for the pair is meanwhile located at 1.2612 - 1.2350 - 1.1943.
Sterling has fallen over recent days following a major poll from Opinium that showed the 'Leave' campaign leading by 3.0%, with a total share of 43%, over Remain's 40%.
This has since been followed by two more polls that confirm the trend.
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.