Sterling has been declining now for three weeks straight, closing in on its 5-year low against the Euro at 1.14! Below we investigate if there is reason to believe it will bounce off that support level and where it will likely find support again, should the decline continue.
Sterling tumbled 1% more against the Euro last week, closing at 1.154 on Friday night. That makes it the third negative week in a row for the British currency, the strong downtrend of which enjoyed a brief pullback last month.
Much like the week before, Friday was once again the worst day of the week having opened at 1.166 and closing at about 1.15 that marks August’s support. All eyes will be on that level the following days. Whether the support level holds or fails, it will be a decisive factor for the future of the British Pound.
1.15 was expected to act as support well before GBP/EUR declined below 1.20, as the currency pair had previously found strong support back in 2013, as noted in our previous posts. Given the significance of that price level and the RSI divergence already taking place on the daily chart, explained in my recent analysis, I’d be surprised to witness GBP dropping below 1.15.
In fact, I can see GBP/EUR touching 1.14 before making another pullback attempt that will certainly convert some bears into bulls! If we take a quick look on the weekly chart, we can see how positively the market reacted every time the exchange rate dropped to 1.14 three years ago. Since GBP/EUR hasn’t traded that low for that long and taking into account the impressive 12-month unstoppable decline, the 1.14-1.15 area looks ideal for a pause, if not a reversal.
Of course, due to the significance of this price region, a break below 1.14 would seriously diminish any chances of a reversal. Should Sterling trade for less than 1.14 euros in the near future, next probable stop would be 1.10, where we will again talk of a possible retracement.
Having said that, as a risk-averse entrepreneur I’d hold on my Sterling bank account for the time being. If I’d been a more risk-seeking one, I might even exchange some Euros into Pounds, expecting another pullback soon. However, by the time GBP plummets below 1.14 I’d make sure I don’t have many British pounds under my name! In that worst scenario, I would again discuss of investing into GBP when the rate hits 1.10.
Meanwhile, Euro bank accounts have been attractive for months now due to Euro’s inactivity against the US dollar, apart from its gains against the Sterling. EUR/USD gained slightly last week, climbing from 1.115 to 1.122.
Eurozone’s currency is trading right in the middle of the 6-month range between 1.10 and 1.15. Yet, it trades close to the upper limit of the 2-year range that has the 1.15 and 1.05 as top and bottom respectively. As long as these two ranges are not penetrated, trusting Euro is probably the safest bet.