Range Trading after Sterling Rally Endangers GBP/EUR Downtrend

– GBP / EUR downtrend in danger after the strongest week since March.
– Range from 1.0950 to 1.11 possible as GBP & EUR consolidate against USD.
– But BoE hits a wild card as a negative rate and virus fears persist.

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The pound to euro exchange rate may have adjusted to a period of range trading after its strongest performance since March jeopardized a multi-month downtrend as Sterling declined an invitation to return to previous lows.

Sterling was the top performing currency last week after months of underperformance accompanied by a reassessment of economic progress in the UK to delay the UK currency from benefiting from a US dollar exodus.

The pound to dollar rate rose 2.27% at the time everything was said and done. This was the strongest performance of all major currencies, helping to lift the pound to euro rate from a range that may be close to the 1.0950 range.

The pound to euro peaked at 1.1115 before falling into the weekend, causing some to think about whether 1.11111 would close daily. This level corresponds to the threshold of 0.90 for EUR / GBP and is the key to the technical development of the exchange rate.

"This is not the harmless dollar decline we had imagined, but one that appears to be due to the fact that a new risk premium has been introduced in the US wealth markets after the US Covid 19 cases have surfaced and the presidential elections may also have started in November to raise their profile, "said Chris Turner, store manager and regional research director ING. "Something surprising British pound has managed to surpass the resurgent EUR and EUR /British pound threatens to break below 0.90. Positioning may have played a role here, but we think it's too early to return wholeheartedly UK POUND. "

Above: GBP / EUR in daily intervals with S & P 500 (orange line, left axis) and measure for the relative strength index of the impulse.

Over the coming week, the most important factor in the pound to euro exchange rate will be the relative pace of gains or losses for GBP / USD and EUR / USD, although both bullish and bearish scenarios are a problem for sterling traders GBP / EUR is still in a range from 1.095 to 1.11.

GBP / USD and EUR / USD have risen sharply lately, while the dollar index has fallen to multi-year lows and is either oversold or overbought by many accounts, meaning a consolidation or even correction period is likely.

"The upward shift is the result of an overwhelming surrender of the dollar and the fact that the pound is considered undervalued against the US currency compared to other G10 currencies. For comparison: GBP / EUR is only around this month If we see some positive Brexit news, GBP / EUR could also charge higher fees, but overall, investors generally remain bearish against the pound – which means they face the uncertainties surrounding the UK economy Brexit and the effects of the corona virus prevail, expect a slowdown in the future and the risk of a second wave, "said George Vessey, a currency strategist Western Union business solutions. "GBP / EUR may experience a decline if EUR / USD continues to rise, but has so far held up against recent moves, largely due to the rapid rise in GBP / USD alongside the EUR / USD surge."

Above: Pound-to-dollar exchange rate at daily intervals next to the euro-to-dollar exchange rate (orange line, text axis).

The pound-to-dollar exchange rate encounters technical resistance around 1.32 and may not have much support before the 1.2750 to 1.28 range. EUR / USD has support from the 23.6% Fibonacci retracement of its May rally at 1.1640 and may find resistance from last week's high around 1.1904.

These numbers imply a range from 1.095 to 1.11 for this week as long as the timing and relative pace of the movements in GBP / USD and EUR / USD are roughly even, although a Bank of England The announcement of the (BoE) policy on Thursday at 12:00 p.m. could be enough to put this area at risk.

"The GBP has performed well over the past month, with only NOK and SEK on the way to outperform the G10 currencies. The broad USD weakness has helped lift the cable by almost 6% in July This is the strongest monthly performance since May 2009, "said Lee Hardman, currency analyst at MUFG. "The GBP is heavily overbought against the USD, suggesting that cables need to be pushed higher in the short term. However, the GBP's recent trade-weighted performance was less impressive as it remains at -1.7% lower than End of April. "

Above: GBP / EUR at weekly intervals with a measure of the relative strength index. The RSI did not confirm the new low of March 2020, which led to a "declining divergence" between price and RSI, which typically indicates a turnaround.

Hardman and the MUFG team made a bearish bet against the pound-euro exchange rate after Sterling's performance last week, and have been cautious about the prospects ahead of the BoE meeting at 12:00 on Thursday. They say if Governor Andrew Bailey gives no signal that further economic support is likely before the end of the year, sterling could widen its recent surge against the dollar, which could also mean a higher pound to euro exchange rate.

However, they also warned that any further interest in using negative interest rates as a political instrument is likely to be poorly received by the pound, which could put both pound to dollar and pound to euro exchange rates in the background. The BoE slowed the pace at which it buys government bonds every week through its £ 745 billion quantitative easing program in May, and the government has not eased its wallets since then.

"Market participants will take a close look at the upcoming BoE political meeting on Thursday to find a new GBP catalyst," said Hardman. "We continue to expect the BoE to be cautious of the extremely uncertain economic outlook given the risk of further disruption from a second wave of COVID and the risk of further growth slump later this year when the fall vacation program expires The NIESR has warned that the government's decision to end the system prematurely will result in an increase in unemployment in excess of 3 million and an unemployment rate of almost 10%, and as a result, we believe that the BoE will make further political changes in November The upcoming BoE meeting will provide momentum for the GBP. "

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(tagsToTranslate) GBP (t) EUR (t) Pound to Euro (t) Exchange Rate (t) News (t) Euro Exchange Rate

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