As the dust from the German election still settles, Euro is fighting back amid political tension rising in Europe. With a controversial referendum having just taken place in the Catalonia region, Spain last Sunday, Euro is looking for stability, while ecodata hasn’t proved that favourable for the Eurozone currency as of lately. Yet, Sterling has been struggling to keep up recent pace and is apparently meeting quite a resistance at 1.14 against Euro. If you have been following our recent analysis, none of these is a surprise, so let’s see if we can keep it that way.
The main question now is whether last week’s volatile action of Sterling’s exchange rate hints a forthcoming decline to this year’s low or has trapped bearish investors before the recovery comes back stronger.
After a promising start and the imminent breakout of the resistance at 1.14, Sterling’s gains evaporated by the end of last week and GBPEUR scored an insignificant win of 0.73% against Euro, closing at 1.133.
Sterling has been appreciating against Euro and other currencies throughout September. However, the rally against Euro in particular, has slowed down considerably in the last couple of weeks, diminishing the hopes for a full recovery after hitting a multi-year low in August. Last month’s upside was the result of improving UK economy, comments by Bank of England’s officials about an upcoming interest rate hike and encouraging for UK signs in Brexit negotiations.
The last few days, though, the British Pound has failed to build on that momentum, despite disappointing Eurozone economic data hitting the market and political uncertainty over Germany and most recently, Spain.
This leads us to believe that Sterling’s recent short-term rally is seemingly exhausting and long-term downtrend is likely ready to resume in the GBP market. This week’s PMI reports will shed some more light on UK economy, while the Conservative party conference and most importantly, Theresa May’s speech on Wednesday will once again inject the political factor into Sterling’s charts. Depending on how all these play out for the UK currency, GBP will continue challenging the resistance or give in to it and resume the freefall.
Euro suffered most of its losses against the US dollar in the first days of previous week and failed to recoup them by Friday when it closed almost a cent lower compared to Monday’s open.
Other than August’s unemployment data that was released today and the minutes from the last ECB meeting scheduled to be published on Thursday, it’s going to be a quiet week for the weakening Euro. As far as politics concern, Catalonia’s vote will almost surely not be recognised, thus the impact on Euro markets will be minor, while German election results have already been priced in.
Nonetheless, we expect a further decline towards 1.16 for EURUSD. Afterall Euro has gained about 16 cents against its American counterpart in 9 months and this kind of climb isn’t sustainable without pullbacks. These have been few and far between during this time, therefore a correction shouldn’t worry Euro investors. Besides, it takes only an ECB rate-hiking comment or soft-Brexit hint for Euro’s rally to resume!