Image © Adobe Images
The Euro can climb further against Pound Sterling says Lloyds Bank.
In its most recent weekly technical analysis of key foreign exchange rates, Lloyds says the Euro should continue to "grind" higher against the Pound, with 2023 highs seen achievable.
"EUR/GBP continues to look bullish, with the drift back from new highs (just shy of 0.87) over the past week failing to knock things back too much," says the analysis.
"We remain well clear of the 0.86 foothold. While it might take a bit of effort to get above the immediate figure, the first decent upside objective is still the post-Liberation Day top up at 0.8738 with the Dec 2023 high at 0.8768 through there," says the analysis.
"Both look reachable in this phase, even if that continues to feel like a grind," it adds.
Above: EUR/GBP at daily intervals with annotations based on the article's text.
The call comes amidst an ongoing trend of appreciation by the Euro, not just against the Pound but also against the Dollar.
From a tactical perspective, Lloyds' strategy team says it likes to "maintain longs" on EUR/GBP, "leaning on the 21 DMA, aiming for at least that 0.8738 level over the next few weeks."
Translating this into a Pound to Euro perspective, the key "foothold" that is underpinning the Euro's ascent at 0.86 turns into a resistance line at 1.1630, which keeps the Pound locked into a downtrend.
The objectives are therefore to the downside, with Donald Trump's 'Liberation Day' low being the first, located at 1.1444, and the December 2023 low at 1.14.
Above: GBP/EUR at daily intervals with annotations based on the inverse of the EUR/GBP analysis.
The British Pound has been under sustained pressure since late May, when the current pulse lower commenced.
The narrative behind the decline is multi-faceted, with solid demand for the Euro amidst a global investor repositioning and hedging of stock market exposure in the wake of developments in the U.S. under Trump.
Analysts at ING Bank describe this as the "euro’s idiosyncratic strength due to its appeal as a reserve currency."
For Sterling, the economic pulse has meanwhile slowed and the odds of a faster and deeper interest rate cutting cycle at the Bank of England have risen.
"Recent UK data releases have not endorsed the market’s tentative speculation on faster Bank of England easing, and two-year GBP swap rates are around 8bp above last week’s lows. Expectations are firmly back on a cut in August and one in December," says Francesco Pesole, strategist at ING Bank N.V.
The European Central Bank (ECB) is meanwhile likely to forgo an interest rate cut at Thursday's policy decision, while guiding the market to expect a final cut in the cycle in September.
With the ECB on hold, and the Bank of England cutting, interest rate differentials should continue to weigh against the Pound-Euro exchange rate.
However, analysts at ING Bank think the Pound is now undervalued against the Euro based on its valuation of relative interest rate fundamentals.
"Short-term rate differential in favour of the pound over the past couple of weeks, EUR/GBP’s resilience suggests markets are attaching some risk premium to the pair, which we currently estimate to be 0.8% overvaluation," says Pesole. "It's already close to the upper bound of the 1.5 standard deviation band that would signal stretched misvaluation."
ING thinks the Pound could be carrying a risk premium relative to the Euro, i.e. investors are nervous and aren't strictly attuned to typical fundamental drivers. If they were, the GBP/EUR would be higher.
He thinks that this risk premium could be to do with concerns about the UK's public finances, which have flared up as a concern in recent times and will continue to do so ahead of the Autumn budget.
Here, the UK Chancellor, Rachel Reeves, has to raise taxes again to cover a burgeoning budget deficit. Without it, markets will question the UK's fiscal sustainability. However, with the tax burden nearing record highs, economic growth will surely suffer.