Image © kasto, Adobe Stock

- Risks skewed to downside for GBP/EUR

- But consolidation around key support expected midweek

- Lloyds analyst says grind lower in GBP/EUR likely to extend

We hear from a number of analysts who tell us they expect to see Pound Sterling remaining under pressure against the Euro near-term but are on the lookout for some consolidation to occur around midweek.

However, our belief is that some consolidation in the the Pound-to-Euro exchange rate is due midweek following the declines seen over recent days amidst a lack of reassurance to currency markets that the E.U. and U.K. are indeed heading towards a Brexit deal before year-end.

There has been no official Brexit news to latch onto, but studies of currency market activity shows a strong demand for future protection against a sharp drop in Sterling, which is in turn keeping the currency under pressure at present.

However, unofficial reports confirm that negotiators are confident some kind of a deal is in the offing. This should protect Sterling from any major slump and reinforces our view that some consolidation in the currency is now due.

Technical analysis by Danske Bank suggests we should looking for support to come into play at 1.1210, this represents the October 01 high; the finding of this support adds weight to our argument for GBP/EUR to consolidate over coming hours.

Above: 1.1210 is identified as an area that Sterling will attract some buying interest near-term.

Looking further out at the coming days though, Valtteri Ahti, Chief Strategist at Danske Bank in Copenhagen says risks are skewed towards further Euro strength against Pound Sterling near-term.

"EUR/GBP continues to grind higher and given that a Brexit deal will most likely not be reached before December at the earliest, we still see risks mainly skewed on the upside near-term," says Ahti.

Expect markets to also keep one eye on Thursday's Bank of England event which sees the November policy decision and Inflation Report presented; this could add to a wait-and-see approach in Sterling trade.

"We do not expect the BoE to find it necessary to send a more hawkish signal to the markets at the MPC meeting on Thursday although it remains a possibility given wages are growing at the fastest pace in this cycle (3.1% y/y)," says Ahti.

"Investors don’t want to be positioned sterling long ahead of Thursday’s central bank gathering even if no important decisions are expected," says Piet Lammens at KBC Markets in Brussels.

Lammens adds GBP/EUR's downward oriented trend is probably more related to Sterling weakness than it to Euro strength.

Lammens says the Pound has suffered over the past 24 hours from an overall fragile risk environment which overshadows a soft Eurozone GDP data release while U.K. CBI data came in below expectations and proved unhelpful for Sterling.

Robin Wilkin at Lloyds Bank says the EUR/GBP cross continues to "grind higher after breaking pivotal resistance in the 0.8840/55 region" adding, "the grind higher is intact with stepping-stone resistance lying at 0.8910/15, 0.8955 and 0.9020 ahead of the range highs."

In GBP/EUR terms, the next targets being eyed by Wilkins in the "grind" lower are therefore at 1.1220, 1.1166 and 1.1086.

Advertisement

Bank-beating exchange rates: Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here