The GBP to EUR exchange rate is looking constructive in the near-term but there is a sense of foreboding with technical strategists at Bank of America Merrill Lynch Global Research reminding us that the longer-term picture suggests the pair must head lower.
Pound sterling buying interest over the course of the past 48 hours has confirmed the 1.2750-1.2600 congestion zone to be an adequate source of support from which to stage a mild recovery.
Gains have subsequently taken the GBP/EUR back above the 1.28 level and, importantly, the pair now resides above its 100 day moving average - could the break below this key level on the 5th have been nothing more than a false signal?
The message is that there is good support to be found for the GBP/EUR exchange rate at present and while sterling still has further to fall before reaching the 2016 lows we would imagine that a notable shift towards the Remain vote in EU referendum polling data would be required to prompt the pair to 2016 lows.
Those wondering where the British pound is headed next will be well aware of the one fundamental risk to the outlook - the referendum.
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.
GBP is a trecherous market at present, and we would suggest risk management becomes your one and only concern.
Don't greedily chase better exchange rates, rather ask the question, "what could go wrong?" and plan your trades/money transfers around the assumption that sterling will turn lower.
If you do that so, you will be safe.
"Costs for GBP buyers could potentially soar if Britain on June 23 ultimately votes to remain in the bloc. GBPUSD started 2016 above 1.47, making current levels more affordably priced for GBP buyers," says Joe Manimbo, Senior Market Analyst with Western Union.
The Pound vs Euro Forecast: Bank of America Eye Out Impending Support and Resistance Points
While we see sterling building up a modicum of support it is worth reminding ourselves of the wider picture.
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 likely to be the cap that those holding out for stronger exchange rates should be aware of.
Support for the pair is meanwhile located at 1.2612 - 1.2350 - 1.1943 and the break of each level invites a fall to the next.
The Pound to Dollar Forecast: Two Scenarios
Ciana and his team have two scenarios to consider when approaching GBP/USD.
Bull case: "The two bullish divergences between price, RSI and MACD that formed while price reached the 61.8% measured move target in March suggest the low could be in. If GPB/USD were to close the week above 1.4632 a technical bottom would form and price would face double resistance at 1.49.
"A breakout though this complimented by RSI breaking 60 and MACD turning positive would add to the bullish technical conditions. A path would open to the extrapolated 200wk SMA at about 1.55 and the 61.8% retracement at 1.5910."
Bear case: "The 50wk moving average, bear flag and trend line resistance hold. Price then closes below weekly support of 1.4285 solidifying the bear flag continuation pattern. RSI fails to break through 60 and MACD rolls over.
"New downside targets are calculated based on the prior trend. First a retest of the 1.3836 low and then the Fibonacci targets come into play including 1.3485, 1.3238, 1.2991 and possibly 1.2191."
Importantly, warns Ciana, if June and Q2 end below 1.4153 it would close below the Q2 2001 quarterly doji candle close and be the lowest quarterly close since 1985.
“A Q2 close below 1.40 would be technically devastating for, give or take, the next ten years. If we called 1.40 the neckline of a head and shoulders downtrend continuation pattern, which are rare and bring some doubt to this analysis, a conservative measured move based on the height of the right shoulder projects lower to 1.2781, 1.24, 1.2027 and 1.08,” says Ciana.
Usually, targets are measured based on the height of the head to neckline.
An Unexplained Surge in GBP in Asian Trade on June 7th
As a sign of how uncertain the market is, just look at the spike in volatility in GBPUSD in Asian trade today.
The pair rocketed higher by nearly 200 points in a matter of seconds on what many traders believed was a fat finger trade during low liquidity time.
The move spread to the GBP/EUR rate too, noted at 5AM London time:
Volatility has risen to its highest level since 2007 and is likely to remain elevated until the referendum is taken on June 23rd.
"With the general public essentially evenly split on the issue, while 17% of the population remains undecided, there is almost no way to handicap the results with any degree of confidence which leaves trading the pair a very treacherous process for the next few weeks," says Boris Schlossberg at BK Asset Management.