The pair maintained its stability above the additional support level at 176.15, making some bullish attempts that pushed it toward 177.25. However, it remains below resistance at 178.10, as the main indicators have continued to show conflicting signals recently.

We emphasize the importance of gathering additional positive momentum to strengthen the pair’s chances of breaking above 178.10, paving the way for further gains toward 178.70 and 179.40. Failure to break above this barrier will force the pair into mixed trading, with the possibility of declining again toward main support at 174.95.

The expected trading range for today is between 167.40 and 178.10

Trend forecast: Bullish

– Written by


James Fuller

STORY LINK British Pound to Euro Forecast: ANZ Cautious as GBP/EUR Tests 20-Month Highs

The Pound to Euro exchange rate (GBP/EUR) held close to 20-month highs around 1.1980 as Sterling continued to attract buyers despite renewed volatility in global equity markets.

However, ING and ANZ warn that the Pound’s rally is becoming stretched, with expectations of further Bank of England rate hikes already heavily priced and increasingly hawkish ECB signals offering the Euro some protection.

GBP/EUR Forecasts: Close to 20-Month Highs

After some evidence of vulnerability when equity markets retreated sharply, Sterling has continued to find support on dips with the Pound to Euro (GBP/EUR) exchange rate trading close to 1.1980 and still near 20-month highs.

Investment banks remain generally reluctant to chase the Pound substantially higher at current levels.

ANZ commented; “The cross [EUR/GBP] has fallen to around 0.834, well below its key daily moving averages. The broader trend is lower, but with the BoE and ECB expected to tighten and substantial UK tightening priced in, we would not chase EUR/GBP downside [buy GBP/EUR] from current levels.”

ING is also cautious over further Pound buying at these levels; “EUR/GBP continues to trade sharply below its short-term fair value, by around 2.6-2.8% according to our models. That continues to reflect the euro’s idiosyncratic premium related to French risk, but even accounting for that, the decline in the pair looks a bit too stretched.”

BoE Debate Shifts towards December and February

Bank of England policy will continue to be monitored closely following last week’s increase in Bank Rate to 4.00%.

The debate has now shifted towards whether policymakers will deliver another increase in December or wait until February.

Deputy Governor Clare Lombardelli said on Tuesday that persistent inflation risks are crystallising and that both meetings remain possible opportunities for further tightening, depending on energy prices and incoming inflation and labour-market data.

ING has argued that consensus around another increase will be harder to achieve next time, with some policymakers considering a one-and-done approach.

Governor Andrew Bailey has also signalled caution over the extent of further tightening.

Market pricing for several additional rate increases therefore still looks aggressive to a number of investment banks, limiting the scope for Sterling to benefit purely from another shift in yield expectations.

Commerzbank maintains the view that the next increase is more likely to come in February than December, particularly if Middle East tensions ease and energy prices begin to normalise.

ECB December Hike Risk Offers Euro Some Protection

The Euro has also gained a potential source of support from increasingly hawkish ECB commentary.

ECB chief economist Philip Lane said on Tuesday that a December rate increase may be necessary if current economic and inflation conditions persist.

Eurozone inflation reached 4.0% in October, and policymakers remain concerned that the energy shock could generate broader price pressures.

This limits the extent to which widening UK rate expectations can continue to favour Sterling.

The Euro-Zone Sentix investor confidence index edged lower to 2.4 in November from 2.7 previously, but remained above consensus forecasts of 2.1.

Sentix commented; “Whilst the economy in the eurozone remains stagnant, there are at least signs of a slight economic recovery in Germany – albeit in tiny steps.”

Markets are also monitoring the race to replace ECB President Christine Lagarde, who will leave office on February 7.

Former Dutch central bank governor Klaas Knot and former Bank of Spain governor Pablo Hernández de Cos are the two nominated candidates, with EU leaders aiming to settle the appointment in December.

For GBP/EUR, 1.20 remains the immediate resistance area.

A sustained break above this level would strengthen the bullish technical picture, while 1.1900-1.1950 should provide initial support.

For now, Sterling remains underpinned by resilient UK growth and expectations of further BoE tightening, but the combination of stretched valuation and a potentially more hawkish ECB limits the case for aggressively chasing GBP/EUR higher.

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USD/JPY climbed above the important 158.50 level as traders focused on U.S. inflation data and reacted to the Household Spending report from Japan. The report indicated that Household Spending declined by -2.8% month-over-month in September, compared to anlayst forecast of +0.3%. On a year-over-year basis, Household Spending decreased by -6.8%.

If USD/JPY manages to stay above the 158.50 level, it will head towards the resistance level at 160.00 – 160.50. The key question is whether BoJ is ready to provide support to the yen in case USD/JPY climbs above the 160.00 level. RSI is in the moderate territory, so there is plenty of room to gain momentum in case the right catalysts emerge.

The DAX in Germany remains positive, but we are slamming into significant resistance. The DAX rising as oil continues to fall is a theme here. There are a lot of concerns about European energy over the winter, especially. But right now, I think there’s a barrier right around €26,750 that we need to get beyond in order to start seeing a bigger move.

At this point, a pullback makes sense, but I think that only offers a buying opportunity, especially if we can see this thing drop closer to 26,000. I don’t expect that today. It’s probably easier to break out than to get down there. But if we do break out to the €26,750 level, I’ll be buying that FOMO move.

EUR/GBP Forecast: ING Sees a Recovery to 84 Pence in Coming Weeks

ING expects the Euro to recover to 84 pence in the coming weeks as doubts about further UK rate rises limit the Pound’s advantage over the single currency.

The Euro-to-Pound exchange rate closed at 83.45 pence in New York on Friday. ING expects a recovery to 84 pence in the coming weeks, a rise of around 0.7% from the closing rate recorded by Crédit Agricole CIB. ING sees room for that move even if uncertainty over French public finances continues to weigh on the Euro.

Francesco Pesole, an FX strategist at ING, writes, “EUR/GBP continues to trade sharply below its short-term fair value, by around 2.6-2.8% according to our models. That continues to reflect the euro’s idiosyncratic premium related to French risk (EUR/GBP has been one of the favourite channels), but even accounting for that, the decline in the pair looks a bit too stretched.”

How much more can UK rates do for Sterling?

All nine Bank of England policymakers voted to raise rates on 5 November. Eight backed the quarter-point increase to 4% and Catherine Mann preferred half a point. For Sterling, the difficulty is that investors have already seen how much agreement there was about raising rates from 3.75%. The next vote will depend on whether policymakers think 4% provides enough restraint.

Pesole writes, “The lack of dovish dissenters in November reinforced our view that the BoE will hike again in February, with some risk already in December. However, as we note here, consensus around another rate increase will likely be harder to achieve next time, as some members are considering a one-and-done approach as a possibility.”

ING therefore expects Sterling to give back some ground even as it forecasts another British rate rise. Governor Andrew Bailey’s caution concerns how far the Bank will ultimately go. If the next increase brings the cycle to an end, the Pound may already reflect much of the extra return UK rates will offer. “A return to 0.840 in EUR/GBP remains the most realistic move in the coming weeks, in our view.”

Bond markets have moved further than the Euro

Crédit Agricole’s model gives a different perspective on the size of the gap. Its strategists Valentin Marinov and David Forrester write, “EUR/GBP’s fair value increased from 0.8469 to 0.8496 due to a rise in the Eurozone-UK box yield spread, as well as a fall in the peripheral EGB yield spread to Bunds. EUR/GBP spot has instead steadied near its recent lows, thus staying more than 1.5 standard deviations undervalued.”

The narrower gap between peripheral eurozone government bond yields and German Bund yields means investors were demanding less extra interest to hold the former. That improvement lifted the model’s valuation while the Euro remained near 83.45 pence. At Friday’s close the bank put the shortfall at 1.77%. Even a recovery to ING’s 84 pence would close only a little over a third of the distance to Crédit Agricole’s estimate. If yields on peripheral eurozone bonds rise again relative to German Bund yields, the model could put a lower value on the Euro.

Who was still buying the Pound?

Crédit Agricole’s separate positioning report shows how much the answer depends on which investors are counted. “The GBP enjoyed some buying interest last week, predominantly driven by IMM flows. Our FX flow data points at hedge funds inflows, as well as banks, corporates and real money investors outflows. All in all, the GBP is in overbought territory.”

The futures market was an important source of last week’s demand for Sterling. Hedge funds were buyers in the bank’s own flow data too, while companies and longer-term investors were sellers. If the prospect of further UK tightening becomes less convincing, some of those existing buyers may reduce their exposure. The bank also observed buying on the other side of the cross. “The EUR enjoyed fresh buying interest last week, predominantly driven by Tactical flows. Our FX flow data points at hedge funds inflows, as well as banks, corporates and real money investors outflows.”

Hedge funds were buying both currencies. The figures cover each currency across markets, so the transactions could include purchases against the Dollar or other currencies.

What this means for EUR/GBP

Standard Chartered sees scope for a larger technical rebound towards 84.50 pence. Its strategists Vincent Tan and Iris Yuen see reasons for Euro demand to recover even if UK rates stay higher. “In contrast, the ECB held its deposit rate at 2.50% in October but signalled readiness to tighten if inflation remains elevated. We expect Euro area inflation to rise further, keeping the ECB’s tightening bias alive. This suggests EUR/GBP has fallen too far relative to interest rate differentials.”

Their assessment also rests on developments outside the central banks. “Germany’s planned increase in federal debt issuance should support Euro area growth, while Moody’s decision not to downgrade France has removed an important EUR tail risk. Meanwhile, tighter UK fiscal policy is likely to weigh on domestic growth and business investment. We expect EUR/GBP to recover towards 0.8450.”

At Friday’s close, a UK importer needed £8,345 to buy €10,000 before fees. ING’s forecast would raise the bill to £8,400 and Standard Chartered’s rebound would take it to £8,450. The first half-penny of recovery would require only a partial easing of the discount both ING and Crédit Agricole see in Friday’s exchange rate.