The euro cracked through a key technical barrier on Tuesday the 5th which suggests another notable break higher in EUR/GBP is in progress.
- Pound to euro exchange rate today: 0.64% lower at 1.1685
- Euro to pound sterling exchange rate today: 0.8554
The liquidation of sterling continues across global markets with the UK currency plugging 31 year lows against the dollar and 3 year lows against the euro.
The big issue for those watching this market is that there appears little sign of consolidation.
The decline has already breached the post-brexit targets laid out by many major institutions suggesting no one really knows where the selling ends. The wisest forecasts appear to be those that were for the deepest falls.
"The only market rising are U.K. stocks and that's only because sterling is falling. U.K. investors are finally waking up to the harsh reality of their country's decision to leave the European Union and mark our words, the dominos have only began to fall," says Kathy Lien at BK Asset Management, referencing the undoubtedly negative sentiment facing Sterling at present.
EUR/GBP Takes a Leg Higher
Sean Lee, founder of the Forextell trading community says there is no point in trying to catch the falling knife that is the pound.
“We do normally like a good contrarian trade but the GBP is showing absolutely no inclination to bounce and it certainly feels as if there is much more downside to come,” says Lee.
Lee believes most traders and hedgers have been awaiting some relieving bounce to sell into but are now being forced to now chase after the market.
Lee expects to see EUR/GBP above 0.90 “in coming weeks” but some moments of relief may be expected if and when some short-term bearish EUR sentiment resurfaces.
However, markets are likely to double-up on their negative GBP bets on such occassions.
The pair has run into, and appears to have overcome, a key technical barrier in the form of the upper border of a rising channel.
We wrote previously that the pair could either correct back from its current position or break above the upper channel line and continue higher.
A move above 0.8450 would probably confirm an upside breakout, and establish a target at 0.8600.
Could we therefore be witnessing the breakout take place?
Alternatively, a move down below 0.8200 would probably confirm a bearish scenario, and a move back down within the channel to an initial target at the monthly pivot level (PP) at 0.8110.
The longer-term picture is more bullish ever since the pair broke above the 7-year down-sloping trend-line drawn from the 2009 highs.
Lloyds Commercial Banking’s Robin Wilkins appears to be more supportive of the possibility of a rotation at the current level and is marginally bearish the pair, seeing a pull-back on the way:
“The market continues to eke out new highs, but divergence developing in a number of intra-day measures is warning the upside is limited. We therefore still look for a move back towards the 0.8300-0.8200 region of support while under 0.8415-25 resistance.”
A Look From the Other Way Around: GBP into EUR
For those who prefer to watch the market from the pound to euro exchange rate angle, here again we see sterling falling just below the level of the lower channel line at 1.1950.
It’s not clear yet whether this represents a clear-cut break below the lower channel line or not, put it possibly could.
A break below 1.1850 would provide more cast-iron confirmation of an extension lower.
The Pound Against the Dollar
GBP/USD meanwhile remains in a sideways market consolidation in between 1.31-35, with more downside potential on the horizon.
Volatility may be affected as volumes will be thin on Monday, since it is Independence Day in the U.S, a public holiday.
Commerzbank’s Karen Jones also sees more downside eventually coming through once the current sideways move has finished:
“GBP/USD basically held sideways last week following Brexit. It has failed at its initial corrective target. And we suspect will come under further downside pressure this week. Below the 1.3124 low we look for the market to head lower to the 1996-2016 support line at 1.2972/65 (this connects all the lows from, 1996-2016).
Lloyds’s Wilkin agrees with the range-bound outlook short-term but expects upside not, downside to follow:
“We remain trapped in a range between 1.31 and 1.35 since the referendum outcome. We expect further range trading today.Overall the current price action is seen as a consolidation ahead of a test of stronger support in the 1.30-1.28 region. A stronger correction through 1.35 sees resistance at 1.3610 and then 1.3800-1.3850.”
Capital outflows seem likely and the BoE appears to be doing its bit to try and ensure the exchange rate is where a large part of the adjustment is seen.
"Thus we expect to hear more BoE talking down of GBP and in that sense take some of the burden off the Bank in cutting rates," says a note from NAB Group, addressing their expectations for the GBP/USD rate going forward.
NAB place the probability of a 25bp rate cut in August at 35-40%.
"We expect GBP to drift to 1.25 over coming weeks and to as low as $1.20 in 2017. It will take EU political issues to set off EUR weakness and a reversal in the EUR/GBP uptrend," says the note.
UniCredit’s Nielsen sees the pound overvalued due to unrealistic hopes Brexit will be reversed
Chief Global Economist of major Italian lender UniCredit, Erik Nielsen, has said he thinks markets are not pricing in the full impact of Brexit due to wishful thinking that Brexit might be reversed.
Nielsen said on Sunday, that there was “no realistic way back,” from a Brexit. This seems to indicate the possibility of more downside for the pound if accurate.
The most likely way in which Brexit could be prevented would be by parliament blocking it, since it needs the backing of parliament to be legally binding.
Whilst it is true that a large majority of MP’s supported remain and they could potentially vote against it, most think such an outcome would be ‘constitutionally unthinkable’, and if MP’s were to go against the people it would plunge the country into an even deeper constitutional and political crisis.
As far as the election of the next Prime Minister goes, it appears the current front-runner is still Teresa May, who has confirmed she will not be seeking to carry out an early general election to seek a fresh mandate (and therefore potentially require a general election victory to get Brexit through), and would be triggering Article 50 in the new year.
Flows Data Confirms Further Declines for GBP Lie Ahead
The CitiFX Global Flows team have reported that they sees flows data pointing to a potential lower leg in GBP.
Given that its data continues to suggest greater GBP selling from the real money funds, this suggests that there is more room for sterling to move lower in near-term.
UBS have meanwhile reported that Sterling saw significant outflows, following the UK referendum result, but only reversed around half of the previous week's inflows.
The majority of GBP selling came on Monday, when the EUR also saw strong selling and the USD was aggressively bought.
The USD finished the week slightly net bought, breaking an 8-week outflow trend.
"After six weeks of inflows, GBPUSD was heavily net sold, with outflows led by asset managers and seconded by private clients. On the other hand, hedge funds were net buyers and corporates were largely flat. EURGBP reversed six weeks of outflows when it was mildly net bought. Inflows were led by hedge funds and offset by net selling from all other client types," says Jeremy Chandler at UBS.
Carney Attempts to Shore Up Economy
Coming after Governor Carney’s initial statement following the referendum to “take all necessary steps to meet its responsibilities for monetary and financial stability”, the Governor was in focus on Tuesday with the FPC announcing immediate action to support bank lending to households and businesses, alongside its Financial Stability Report.
As widely expected, the FPC announced the reversal of the decision made in March to increase the counter-cyclical capital buffer to 0.5% from April 2017.
Barring any material change in the outlook, the FPC expects to maintain a 0% buffer until at least June 2017.