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British Pound's Descent Against the Euro Accelerates, Next Big Target is Forecast at 1.20

Pound under notable selling pressure at the present time

The pound to euro exchange rate (GBPEUR) remains under notable pressure but we note that the move lower has reached 'oversold' territory which hints at possible relief in coming days.

  • Pound now oversold against euro suggests our analysis, but calling relief rally nearly impossible
  • We are all-out bearish on sterling over the coming three months

The pound has been in decline against the euro for six of the last seven trading days now. On the 30th of March the pound hit a high of 1.2763 and today we see it trading at 1.2335.

What is frustrating for the analyst community is that this sweep lower failed to respect any of the levels that they had forecast it to find support at.

Importantly, there are no obvious explanations triggers for the recent falls.

Given, every man and his dog who has something to say about currencies is blaming the EU referendum, but it is worth pointing out that there have been no specific shifts in favour of the Leave camp of late; if anything the story is unchanged.

"UK macro data has not really convinced but neither has it been that poor. The possibility of a Brexit is of course the main reason for the weakening currency, but there has not been any major shift in public opinion, judging by the opinion polls that  are coming out," notes Lars Henriksson at Handelsbanken Capital Markets.

We believe some 'big fish' in the currency markets have made their move to cut exposure to sterling ahead of the referendum, such decisions don't need any notable events as a trigger.

Latest Pound/Euro Exchange Rates

United-Kingdom European-sUnion
Live:

1.1784▲ + 0.03%

12 Month Best:

1.1931

*Your Bank's Retail Rate

 

1.1383 - 1.143

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Expect More of the Same

We have written that many major institutional analysts are forecasting further 'Brexit premium' to be written into the British pound exchange rate complex.

What this means, in short, is that for the risks of a Leave vote to be fully incorporated into sterling it needs to move lower. It's not necessarily that Leave would be a bad outcome for the UK economy, indeed it could be a good thing, but what the currency doesn't like is the uncertainty posed by such an outcome.

What we are most likely witnessing is the continued trend of businesses and individuals cutting exposure to sterling in the run up to the June 23rd event. No doubt speculative traders will be aiding the move by jumping onto an established and profitable trend.

Handelsbanken's Henriksson says he does however believe there may be an excessive fear of Brexit now and reminds his clients to keep in mind the massive rally in sterling witnessed in the wake of both the Scottish Independence referndum and the Conservatives' victory a year ago.

Oversold

What has changed over the past 24-48 hours is the move lower has become excessive. The pound to euro rate is oversold in the medium-term timeframe, confirmed by the Relative Strength Index on the daily charts.

The RSI now reads at 27.5, a reading of 30 and below confirms oversold conditions while anything at 70 and above confirms overbought conditions. 

The pound has always bounced higher on hitting 30 since February. However, if we look back, the rate spent the majority of December and January below 30.

So what we know is that the rate is oversold but the timing of a relief recovery is nearly impossible to call based on recent evidence.

 

1.20-1.22 Ahead

We are all-out bearish on sterling over the coming three months and anticipate numbers around 1.20-1.22 to be tested towards the end of this timeframe.

There are no signs the trend is about to reverse so we expect a continuation lower.

It is currently at the level of a minor down-target at 1.2360, which was generated from extrapolating the height of the previous sideways range lower, after the down-side break.

If the exchange rate can break below 1.2330, that will probably confirm a continuation down to the next target at 1.2279, where the S2 is situated.

The S2 means the S2 Monthly Pivot, which is a level derived from the previous month’s high, low, open and close.

Pound to fall to 1.20 target

It is expected to provide support to the exchange rate, which means the rate will probably pause or even bounce at S2 since traders often cluster buy orders at monthly pivots in a falling market, so as to take advantage of the expected bounce.

A clear break below 1.2279, signalled by a break below 1.2240, however, would probably open the way up to a clear move down to 1.2000 (psychological round number), where the market would also be expected to pause for a breather.

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