- GBP/EUR pointed lower short-term
- Watch 20-week MA at 1.1647
- ECB main calendar risk
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- GBP/EUR reference rates at publication:
- Spot: 1.1650
- Bank transfers (indicative guide): 1.1340-1.1420
- Money transfer specialist rates (indicative): 1.1545-1.1590
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- Set up an exchange rate alert, here
The Pound-to-Euro exchange rate (GBP/EUR) could lose value over the next few days according to a new short-term technical analysis, although where it ends the week will likely rest with the outcome of Thursday's briefing from the European Central Bank.
The Euro has held an advantage against the Pound since the GBP/EUR peaked at 1.18 and turned lower on August 10.
GBP/EUR currently finds itself drifting sideways and it appears the market is looking for its next major driver.
With this in mind, Axel Rudolph, Senior FICC Technical Analyst at Commerzbank says the Euro is likely to remain bid as long as the GBP/EUR exchange rate remains below the 20 day moving average.
At the time of writing we identify this level to be located at 1.1695:
Rudolph says provided rallies remain capped below here "the market stabilise and re-try" to the downside.
For now Commerzbank's technical strategists maintain a near-term downside bias and they would allow for a move to 1.1600 and then 1.1532, which is the July 2021 low.
However, they view a break above ~1.1800/1.1810 as being necessary to turning the trend decisively in favour of Sterling and opening the door to a target at 1.2030/1.2137.
Taking a step back and lengthening the timeframe is Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank, who notes the Pound to be "performing reasonably well".
He notes the GBP/EUR exchange rate to be "trading comfortably inside" a 1.17-1.1630 range.
A look at the multi-week timeframe meanwhile reveals the Pound-Euro exchange rate to be supported by the 20-week moving average:
FX transfers: Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more. (Advertisement).
A break below here could therefore be one to watch for as it could signal a more meaningful turn lower by the pair.
The 20-week moving average is presently located at 1.1647.
Where the Pound ends the week against the Euro will to a great degree rest with the outcome of Thursday's meeting of the European Central Bank (ECB) where reveal guidance on potentially winding down its emergency asset purchase programme might be revealed.
"The key focus this week will be central bank rate meetings in many regions, including the Eurozone," says Turner.
The market expects the ECB to lag both the Bank of England and U.S. Federal Reserve in ending quantitative easing and then raising interest rates.
This assumption has lead many analysts to maintain a relatively cautious stance on the Euro's outlook against the Pound and Dollar.
But should the ECB strike a relatively optimistic tone on the Eurozone economic outlook, and suggest it is ready to begin closing down PEPP, the Euro could benefit. (PEPP: Pandemic Emergency Purchase Programme, more on this here).
"Expect EUR/USD to remain bid through the early part of the week as the market adjusts positions ahead of Thursday's ECB meeting," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
A bid for EUR/USD could help EUR/GBP (send GBP/EUR lower), depending on how the Pound performs against the Dollar: any relative underperformance against the Dollar leaves Sterling vulnerable to the Euro.
The Eurozone economy continues to recover and inflation is rising amidst falling levels of Covid-19 and associated restrictions, representing a positive shift in fortunes for the Eurozone economy.
With the UK economy having experienced waning economic momentum, the Pound has understandably relinquished some value to the Euro.
Investment bank Crédit Agricole says in a weekly research publication they expect Euro exchange rates to be reactive to:
(1) the ongoing debate at the ECB Governing Council about the need to cut stimulus in view of the Eurozone recovery;
(2) the intensifying inflation overshoot; and
(3) favourable financial conditions.
"In particular, evidence that ECB Governing Council members agreed to ‘taper’ its PEPP programme but deferred any decision to extend QE purchases beyond Q122 in part because of the improving ECB economic outlook could boost EGB yields and help the EUR regain more ground," says Marinov.
However some analysts are of the view that ECB President Christine Lagarde and her fellow board members could yet push back against the notion that the economy requires a reduced support.
Such a move would likely be build around a view that current hot inflation levels will prove temporary and therefore fall back to below 2.0% ever the medium-term.
Recall, the ECB has now readjusted its mandate to accommodate inflation above 2.0%, whereas before it was judged necessary to tighten policy when inflation was looking set to hit 2.0%.
Any caution regarding the economic outlook combined with an unambiguous message that it is too early to consider ending PEPP could pose significant headwinds to the Euro and offer Sterling an opportunity to appreciate.