Pound to Euro Exchange Rate Forecast: Higher Short-Term as Clam Returns, Lower Longer-Term

The British pound (GBP) maintains a shaky recovery as sentiment appears to stabilise on global foreign exchange markets after the most tumultous trading period witnessed since the 2008 financial crisis.

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Market conditions continue to calm down following an explosive period of volatility.

The VIX index which measures expected S&P volatility saw its sharpest drop in five years yesterday, falling below the 20 level that is often seen as the line denoting risk-off chaos.

The index is often referred to as the “fear gauge” and should go some way in explaining why stock markets are trading higher once more in Asian trade.

Financial stress indicators are constrained and we note no concerns on "Ted" spreads (T-bill and Eurodollar spreads – an indication of banking sector funding stress) on any side of the Atlantic and PIGS spreads remain contained.

The change in sentiment is natural as must remember that Brexit is a shock - it is not a crisis. 

"Global markets have seen two days of sharp losses followed by two days of good recovery. This conveniently has taken us to the end of the second quarter, a quarter where sterling and eurozone stocks were the clear underperformers and where the yen, gold and oil were the notable gainers," says John Cairns at RMB in Johannesburg.

The pound will ultimately edge lower in all likelihood as one thing markets are increasingly confident on is the Bank of England cutting interest rates.

The cut to the 0.5% base rate will see interest rates across the economy fall, ensuring the yield offered to international investors decreases.

Pound to Euro Forecast

The new week started with some marginal follow-through selling down to a new low at 1.2016.

Since then we have witnessed a slight bounce back up to the current level in the 1.2040s.

Further downside continues to threaten, however, with the next target at 1.1850, which is calculated by extrapolating the height of the broadening pattern of the previous correction, and extrapolating it down.

A break below the previous day’s 1.2016 lows would probably confirm the extension lower.

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Pound to Dollar Forecast

The pound to dollar has broken out to the downside of a descending channel, accelerating the medium term down-term.

The breakdown out of the channel has an initial target generated by extrapolating the height of the channel lower, which gives a minimum target at 1.2700, which is a Fibonacci 61.8%  of the full height.

As such a break below the 1.3224 would probably lead to a move down to 1.3000, followed by 1.2700, which is the 100% extrapolation of the height of the channel.

There is a possibility this may be an exhaustion move, however, it is still too early to say yet.
Commerzbank’s Karen Jones was cautiously bullish, saying that a type of cyclical chart analysis called Elliot Wave analysis might be indicating a move back up to 1.41:

“After such a strong down move it would be ‘normal’ to see a period of consolidation, and currently the intraday Elliott wave counts are implying a return to 1.4100 .”

Lloyds Commercial Banking’s Robin Wilkins sites 1.2800 as an important support level, inferring it as a possible target:

“Marginal follow-through selling yesterday has seen the market push down to the 1.31/1.30 region. While 1.28 is more important support below here, intra-day and daily studies are suggesting that at least a correction phase can be seen. Pivot resistance lies in the 1.3400 region.”

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'Remain' Supporters Won't Let Go of Loss

A backlash is growing to stop a full Brexit from going ahead -  mainly in London, where an anti-Brexit rally is being held in Trafalgar Square this evening, and a petition has already gained over 2.5 million signatories, well above the minimum required to oblige the commons to debate the subject, and making it the largest petition ever.

Today sees the start of talks in Brussels amongst EU leaders to determine how to react to Brexit. David Cameron will be joining them to ‘explain why the British people voted to leave’.

The news that rating agency’s Standard and Poor and Fitch downgraded the UK from its previous triple A rating to just double A on Monday, further hit sentiment around the outlook for the UK economy.  

There were also reports that the Conservative party were attempting to speed up Cameron’s withdrawal from office so that the new leader could begin renegotiations.

Boris Johnson is still the favourite to take over from him, whilst Teresa May appears to be the favoured ‘anti-Boris’ candidate.

Euro to Pound Sterling Forecast

The EUR/GBP pair has rallied up to a cluster of resistance levels, including a 7-year trend-line, and the R3 monthly pivot, a level where traders often launch counter—trend strikes at 1.8394. 

These levels are likely to prove a major obstacle to further gains and may result in a correction, with a possible move back down to 0.8000 on the horizon.

If the up-trend extends higher, however, and breaks above the 0.8317 highs, that would confirm a move up to 0.8496.

It is worth noting that analysts can differ on where a trend-line ought to be drawn, with Commerzbank’s Jones drawing her 7-year trend-line slightly lower, and arguing it has already been definitively broken:

“EUR/GBP took out its major downtrend at 0.8114 following the Brexit vote, this was the 7 year down channel and this has completely altered the outlook. Next resistance is the 50% retracement of the move down from the 2009 peak at 0.8370”

Lloyds’ Robin Wilkins is quite bearish, seeing a strong likelihood of a pull-back on the horizon:

“Intra-day studies suggest a pullback is possible, especially while this resistance caps. A decline through pivot support in the 0.8225/00 region would add further confirmation of that correction phase, with trend support lying in the 0.8050/0.7975 region below.”

Longer-term he expects this move higher to be the final leg in the up-trend:

“Long-term, aligned with the GBPUSD view above, we believe this move to the topside is the last within the correction from the 0.70/0.69 support region. We have no sign of a top yet though, with a move above 0.8370 leaving room towards resistance above there in the 0.8700-0.8900 region.” 

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