Euro to Pound X-Rate Outlook: 0.90 Now in Sight, May Could Shake the Market

The EUR/GBP exchange rate is rising in a strong short-term uptrend which is expected to continue.

The pair gapped higher at the start of the new week on news that Theresa May has hardened her approach to Brexit, suggesting immigration control would not be bargained for access to the common market.

Confirmation might come in a highly-anticipated speech scheduled for Tuesday 16 and if confirmed then there exists the possibility that the pair may move even higher.

The gap higher has however now been filled as markets bought Sterling in anticipation that May doesn't deliver any new negative news. 

This retracement in EUR/GBP is thus more of a technical trade rather than a reflection of fundamentals as the ‘gap fill’ trade is a common strategy amongst technical traders.

At these elevated levels the market, nevertheless, looks a little toppy so we would ideally wish to see confirmation from a break above 0.8900 before making a stronger call for gains.

If such a breach occurs, however, the exchange rate would be expected to rise up to the next target at 0.8975.

Even more ambitious with her bullish targets is Commerzbank analyst Karen Jones, who forecasts more upside into the 0.90s, due to a combination of a break above a key resistance line giving new blood to the uptrend and the Elliot Wave count.

Elliot wave is a form of cycle analysis which sees up and down cycles as composed of 5 waves, Jones sees the move higher as composed of an incomplete number of waves and therefore at risk of extending.

Jones says:

“EUR/GBP has eroded the 3 month resistance line at .8767 and extended to Fibo resistance at 0.8853.

“Intraday Elliott counts are suggesting that this will remain bid above .8640 and there is scope for gains to the .9050 November high and even .9142 the 11th October high.

“Below .8640 is needed to re-focus attention back to the near term support offered by the 7 month uptrend at .8463."

Commerzbank's Karen Jone's chart with trading advice.

PM May to Deliver Highly-Anticipated Speech

There will be heightened focus on politics on Tuesday January 17 when the UK Prime Minister May delivers what is billed as the most anticipated speech on Brexit since the UK’s referendum to leave the EU last June.

Weekend press suggested that May would use it as an opportunity to outline a hard initial stance.

"Theresa May is caught between a rock and a hard place, where support for a soft Brexit is required for business confidence yet further talk of a hard Brexit helps strengthen our hand during trade negotiations. Ultimately, May has to show a willingness to take the hard Brexit approach to avoid single market access becoming the EU’s number one tool within trade negotiations," says analyst Josh Mahony at spread betting company IG in London.

We have heard from some that the majority of the weakness that the speech is likely to deliver has already been absorbed into the price of Sterling.

Therefore the bar for further declines has been raised.

So far, Theresa May has deflected the question of hard or soft Brexit, saying:

“I don’t accept the terms hard and soft Brexit”… we’re going to get an ambitious, good and best possible deal for the UK in terms of trading with and operating within the single European market”.

Analyst Elsa Lignos at RBC Capital Markets believes if she will not state it clearly when questioned, she may not state it any clearer in her speech – “which could disappoint those looking for a further GBP sell-off.”

However, other strategists believe a recent consolidation in Sterling is coming to an end, and the only way forward from here is lower.

"Investors appear to have priced out virtually all of the Brexit-related risk premium from Sterling in recent weeks. We think that is likely to change soon,” says analyst Ned Rumpeltin at TD Securities in London. “While the near-term landscape argues for some volatility, we think the chances for GBPUSD to squeeze meaningfully higher are limited.”

TD Securities say they are returning to a sell-on-rallies posture and for GBP/USD, a break below support at 1.1841 will usher in another phase of Sterling weakness.