Sterling finally found support during its long decline and there is some merit in discussing the probability of a strong pullback, or dare we say, a full reversal! Of course, we still have a long way for the last claim and, for the time being, we can make some bold predictions only for the near future. Besides, we are not used to advise going against the trade! Read on to find out why.
Two positive weeks for the Sterling have pushed its exchange rate against the Euro to 1.191, after hitting a two-year-old low at 1.146 mid-August. The GBP may seem soaring at the moment, yet the British currency is on an 8-month downtrend since it last traded for 1.44 euros back in November 2015. That freefall has only picked up speed recently following the Brexit vote.
Having said that, the Pound enjoyed a surge the past few days, which should not be powerful enough to end the long-term trend. Bearish sentiment is well established in the UK economy, especially due to the EU referendum result that took the market by surprise. The recent notable reversal came down to encouraging ecostats from the UK construction and manufacturing sectors, which, although they were expected to have been improved on a monthly basis, they in fact, beat estimates!
I talked of the significance of 1.14 being expected to act as a support level for GBP exchange rate in my latest article. Now that 1.16 support failed in August and price jumped on 1.146, it’s safe to assume that it would take quite an effort for the GBPEUR to dive below the 1.15 area. Let’s pull up the monthly chart indicating the support range to make that more clear.
Given this picture, technical analysis implies that the Sterling’s decline has met strong resistance as predicted, which is already quite obvious following last month’s price action. The real question now is whether there will be another test of that green support area. Yet, under the current circumstances and for the first time since late 2015, converting Pounds into Euros at current rates doesn’t seem that smart.
There is a big chance for the Pound to pull back to 1.25 before the downtrend resumes. Then, a failed retest of the support level (meaning GBPEUR does not decline lower than 1.15 on another attempt to break support) would increase the likelihood of an actual reversal! That could boost Sterling’s price way up, even testing the almost decade-old resistance level of 1.44! But it’s still too early to even discuss that scenario.
Short-term I would expect GBP to climb a bit more this week, as a result of expected positive signs for the UK economy from the Services sector on Monday. Wednesday is another news-heavy day for the Pound, but I take it that last week’s momentum will keep up.
Euro continues to trade inside the two-year-old range between 1.05 and 1.15 as we discussed in previous posts. Euro closed at 1.115 on Friday losing just a tad for the week. EURUSD had been trading in the narrow range of 1.10 and 1.14 since March, with an exception on May when it peaked at 1.16 momentarily, before retracing back into the range.
This week Euro-related news include a European Central Bank press conference on Thursday, but other than that, the exchange rate will be mostly influenced by the Dollar and ecostats coming from Eurozone countries.