- GBP/EUR rebound falters

- Technicals advocate for further losses

- Ireland raises heat over Article 16

Image © Bank of England

The bullish sentiment that pushed the Pound to Euro exchange rate to 1.19 in late October has "evaporated" for now says a noted technical analyst we follow, a call that comes as tensions between the EU and UK rise again over the issue of Northern Ireland.

Bill McNamara, formerly an analyst at brokers Charles Stanley in London and now head of The Technical Trader, says a breach below 1.15 could even come into play for the exchange rate.

GBP/EUR fell 1.50% in the previous week and is looking to form a floor after the Bank of England surprised markets by opting to not raise interest rates while releasing guidance that suggested a rate hike in December was also unlikely.

The market had readied for a move to come in 2021, bidding the Pound as a result.

"Sterling/Euro recently ran up to a trading high of 1.19 – its highest reading in more than a year and a half – but the bullish sentiment that drove it up to that level evaporated last week as traders reacted to the Bank of England’s decision to leave rates on hold," says McNamara.

Image courtesy of the Technical Trader.

GBP/EUR rates at publication:

Spot: 1.1695High street bank rates (indicative band): 1.1386-1.1468Payment specialist rates (indicative band): 1.1590-1.1637Find out about specialist rates, hereOr, set up an exchange rate alert, hereMcNamara says the scale of the previous week's slump "looks like a pretty clear signal that the rally is over for now".

He observes the appearance of bearish divergence on several technical indicators on the charts as underpinning this view.

"Further near-term weakness is possible and the next target is the September low, at 1.157 (which was also a support area back in July); if that fails to hold the April low, at 1.146 or so, could come into play," says McNamara.

Foreign exchange strategists at BMO Capital have meanwhile said they are inclined to stay defensive on the Pound-Euro exchange rate in the wake of last week's Bank of England decision and emergent Brexit tensions.

BMO's European FX strategist, Stephen Gallo, says a key downside risk to the Euro was the European Central Bank's status as a laggard when it came to normalising policy via ending quantitative easing and raising interest rates again.

This was particularly relevant against the Bank of England which looked to be an earlier started on the road to normalisation.

But, the Bank of England's pushback against market expectations eases divergence with the European Central Bank and diminishes upside forces in GBP/EUR, according to Gallo.

{wbamp-hide start}

{wbamp-hide end}{wbamp-show start}{wbamp-show end}

"Much will depend on the shape of tier-1 economic data from the UK between now and the December 16 MPC policy announcement. But given the Bank's track record of refraining from policy tightening during the month of December, we judge that there would have to be, at the very least," he adds.

Next week's labour market data could help ignite some upside impetus into the Pound if it comes in ahead of expectations as it could nudge up expectations for a December interest rate hike.

But, consensus estimates amongst economists and money market pricing shows February as the overwhelmingly preferred date for lift-off.

If labour market data meets expectations, or disappoints, further downside in the Pound could follow.

Above: File image of Leo Varadkar. Image © European Council, Reproduced Under CC Licensing.

BMO Capital Markets are also cautious on Sterling's prospects given the rising tensions over EU-UK relations and the prospect of a trade war being ignited over Northern Ireland.

Media report the UK is looking to unilaterally rescind some of the elements of the Northern Ireland protocol to ease trade barriers between the rest of the UK and Northern Ireland.

"For the time being, we also expect the GBP to trade with a more of a defensive tone on the expectation that the UK government will trigger Article 16 of the Northern Ireland Protocol at some point during the second-half of November," says Gallo.

The EU are reportedly readying a set of sanctions if the UK goes ahead, leading to fears fo a trade war.

"I don’t think anybody wants to see the European Union suspending the trade and cooperation agreement with Britain," Ireland's Deputy Prime Minister Leo Varadkar told RTÉ.

"But if Britain were to act in such a way that it was resigning from the protocol, resigning from the withdrawal agreement, I think the European Union would have no option other than to introduce what we call rebalancing measures to respond," he added.

Gallo says a 'trade war' is not by any means a done deal at this stage, but risks around the issue are emerging.

BMO Capital now see better support in EUR/GBP at the 0.8500 level (or GBP/EUR resistance at 1.1765).