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Euro forecast to fall against the Pound

Monday, August 11 13:58:42

ECB head Mario Draghi's words last week and what Bank of England chief Mark Carney is likely to leave unsaid on Wednesday may combine to push the euro lower against sterling in the coming days.

"The fundamentals for a weaker exchange rate are today much better than they were two or three months ago," Draghi said on Thursday, referring to the external value of the euro.

"ECB interest rates will remain at the current level for an extended period of time," he said after the ECB's latest policy meeting. That current level is a record low refinancing rate of 0.15 percent and the minus 0.1 percent rate on bank overnight deposits.

Carney, due to present the BoE's quarterly inflation report on Wednesday is expected to emphasise that UK benchmark rates will increase gradually without saying when.

He doesn't have to. The direction of UK rates is not in question, only the timing - a stark contrast to the ECB's stance.

The clear implication is that the pound, which rose more than 5 percent versus the euro between the beginning of the year and July 23 but has since given back some of those gains, is set to recapture some of the lost ground.

The euro may have room to slip back to at least 78.71 pence, July's low versus sterling.

Chartists might also conclude the upside for the euro against sterling is limited.

The pair may struggle to rise through the 55-day moving average, currently 79.88 pence, and the base of the daily ichimoku cloud, now 80.05 pence, both just above Monday's opening price of 79.86 pence.

And if chartists conclude the euro cannot rise versus sterling, then it is likely to fall as traders test to see if there is room on the downside in the exchange rate.

Positioning, or rather the perceived lack of it in the euro/sterling exchange rate, might also suggest there is room for the pound to appreciate against the single currency.

Admittedly, positioning seems still to be skewed towards being short euros against the dollar, judging by data from the Commodity Futures Trading Commission (CFTC) released on Friday. That showed euro shorts versus the dollar totalled 128,747 contracts, the largest net euro short position against the greenback for two years.

Yet the same data showed that traders had cut back their long sterling position versus the dollar to a net long of 12,121 contracts, down from 24,910 the previous week.

That suggests the short euro versus the pound exposure is much less crowded than euro versus the dollar. Apparently, room may be left to buy sterling anew against the euro. (Reuters)

For more visit: www.businessworld.ie