Pound also falls following lower growth forecast

Euro Highlights

• Euro enjoys a short-lived boost

• Pound also falls following lower growth forecast

 

Sterling - Euro (GBPEUR) FX Technical Analysis

The month of December had the potential to be a memorable one, with heightened political uncertainty, increased volatility and various central bank meetings. In the end, however, the Sterling-Euro exchange rate ended the year in a somewhat disappointing fashion by forming a narrow trading range. It was not that the events themselves disappointed, but it was the way in which the market reacted to these events – clearly demonstrating the markets' ability to price in any risk and learn from past events to expect the unexpected.

Euro-Sterling rate a major trend line

The 1.20 level still remains a clear level of resistance, which is not only a psychological level, but also has particular relevance, as it is a major trend line that has been in place since 2009. Momentum has turned lower and this could be in part to traders squaring up their year-end positions, with support likely coming in at 1.17.

Euro enjoys a short-lived boost

First to hit the calendar was the Italian Referendum; although the vote went against the status quo, investors had already been selling Euros aggressively in November, so once the results were announced there was a flurry of short covering – a clear scenario that we see all too often in the currency markets of ‘buy the rumour, sell the fact'. The Euro was also kept buoyant as the view from the market that the No vote on the Senate reforms didn't automatically mean a No vote on EU membership.

The strength in the Euro was short lived, however, as the European Central Bank surprised the market by extending their asset purchase programme by nine months rather than the six expected months; longer than investors anticipated. The amount of bonds bought per month between April and December were reduced to 60 Billion Euros instead of 80 Billion Euros. At first glance, the market took this as a tapering manoeuvre; causing the Euro to strengthen aggressively. However, after plugging the sums into their calculators, traders quickly realised that €60 Billion over nine months is greater than €80 Billion over six months.

The markets were expecting a more hawkish rhetoric from ECB President, Mario Draghi, due to the optimism he had expressed earlier in the month, but in this conference he took a more cautious approach; talking about the possibility of more stimulus and even hinting that there is no tapering in sight. It was clear that the ECB President was not looking to make the same mistake he made in previous meetings, where he had underwhelmed the market. Some analysts had expected Draghi to take his foot off the gas with the stimulus, but he was in no mood for that, as a stronger Euro could jeopardise their fragile recovery.

Pound also falls following lower growth forecast

With the continual upside surprise in the UK macro-economic data since the UK EU Referendum, the markets had expected a bolder statement from Bank of England Governor Mark Carney, however, the statement was relatively subdued. Governor Carney repeated his statement regarding limited tolerance for above target inflation, however, the Central Bank felt inflation may accelerate by less than they had previously forecast, due to the recent gain in the Pound. The UK's Central Bank also revised their growth forecasts lower, thus reducing the chance of any interest rate hike, which put an abrupt end to the Pound's recent rally.

All eyes on the Supreme Court...

Sterling is likely to trade within a narrow trading band as we await the decision from the Supreme Court Ruling on the UK Parliament's involvement in the decision to trigger Article 50. Parliament has already backed UK Prime Minister Theresa May's motion to start Brexit proceedings by March 2017. In return, the UK Prime Minister has agreed to offer more details of the Brexit strategy. Having a definitive date could cause large fluctuations in the value of the Pound as traders analyse a hard or soft Brexit headlines and the repercussions that could follow.

For Euro Buyers

There are two-way risks posed by the Brexit proceedings and the European elections. If you haven't reduced your exposure, then look to do so below the 1.20 level. Then, you may wish to consider placing a protective stop below the 1.17 low that we saw in December.

For Euro Sellers

With the impending elections in Europe and expected volatility from EU political instability, it is important to reduce your exposure. Momentum has turned lower, so consider reducing your exposure above the bottom of the recent trading range. Look to leave protective stops above the 1.20 Level.