GBPEUR breaking above key level on the charts1.1650 could thwart upside near-termGreat levels for EUR buyers says Equals Money

Image © Adobe Images

Pound Sterling must breach a key level against the Euro if it is to extend its uptrend into the 1.17-1.1750 and deliver new 2023 highs, according to a new analysis.

Bill McNamara, analyst and director at The Technical Trader, says Sterling has steadily been recovering from last year's deep slump and last week's 1.0% rally against the Euro means it is finally lifting its head 'above water'.

"As the weekly candlestick below illustrates, the UK currency has been caught in a downtrend over the last 15 months, so it's worth highlighting the fact that last week's 1% advance lifted it above that line (albeit marginally), and to its highest reading this year," says Bill McNamara, analyst and director at The Technical Trader.

Image courtesy of The Technical Trader.

McNamara cautions euro buyers that the exchange rate is approaching a key level of resistance that might thwart further gains.

However, if the level breaks, a rally above 1.17 then becomes feasible for the Pound to Euro exchange rate.

"It should be noted that it experienced significant resistance at 1.1650 or so in Q4 of 2022, so that level might yet act as an impediment to further near-term upside," says McNamara

If that level is breached, however, the next target is at around 1.1750," he adds.

Other technical indicators reveal the previous week's rally took GBPEUR into oversold territory on the daily charts (near-term timeframe) and an unwind of that strength was therefore highly likely.

It appears Sterling's setback on Monday fulfilled this requirement and a steady bid through midweek confirms a broader positive technical setup underpins GBPEUR.

It is however a supportive fundamental landscape that underscores the positive technical setup behind GBPEUR and Joe Manimbo, Senior FX Analyst at Convera, says a focus on global lending rates is putting the wind in Sterling’s sails.

Prospects for an additional further 75-100 basis points of hikes at the Bank of England have jacked up UK bond yields (a key benchmark for lending), making UK financial assets increasingly attractive when compared to those in other countries with lower rates.

The inflow of foreign investor capital creates an obvious bid for the Pound, and as long as the Bank of England is seen out-hiking its peers, Sterling might just remain supported.

"The pound edged into positive territory for the week amid expectations for the Fed to delay its next rate increase, while the Bank of England on June 22 is all but certain to raise UK borrowing rates for the 13th consecutive time from 4.50%. The spectre of a smaller yield advantage for dollar-based assets has left recent greenback gains vulnerable," says Manimbo.

This dynamic applies equally to the Euro, given the European Central Bank is anticipated by markets to hike a further 50 basis points over the remainder of 2023, confirming the UK will command a decent yield advantage to the Eurozone once the hiking cycles complete.

Sanjay Raja, Senior European Economist at Deutsche Bank, says the UK economy has held up far better than almost all forecasters expected.

"2023 GDP will likely remain in positive territory – in spite of the fastest monetary policy tightening cycle in several decades. Sentiment has improved dramatically recently. Inflation expectations have fallen, on the back of expected falls in energy prices later this year. Income growth expectations remain robust too, with public and private wages holding firm. Households have also yet to feel the full brunt of the tightening cycle," says Raja.

Thanim Islam, Head of FX Analysis at Equals Money, says the current levels in GBPEUR offer a "great opportunity" to buy euros.

"GBPEUR continues its climb higher... with the pair now at 6-month highs with the December high now in sight," he says.

General weakness on the Euro has helped the ascent says the analyst, but "the main factor continues to be the divergence in interest rate expectations between the BoE and ECB which was given a boost after data in May suggested that inflation isn’t slowing as quickly as expected."

"Current levels present a great opportunity to buy EUR," he says.