Pound to Euro: A Critical Juncture in the Multi-Year Uptrend

The near-term outlook for the pound sterling against the euro remains biased to the downside, but the more interesting picture is viewed from a multi-year approach.

We are seeing the GBP put in some relief gains against the euro following the release of better-than-expected employment and wage figures out of the UK.

Those looking for a more sustained improvement in the GBP/EUR’s situation will however have to be patient.

If we are to obey the notion that ‘the trend is your friend’ and observe the idiom of how futile it is to ‘swim against the tide’ the following graph tells us a story:

Momentum clearly favours the euro at the present time and we see little reason to pick a bottom in the GBP/EUR noting the channel is titled to the downside.

Some would argue that we need to step back and look at the bigger picture - that the trend higher in the sterling / euro since 2013 should ultimately favour a resumption in the pound’s rally.

However, even in observing the monthly chart we note that there are warning signals concerning the GBP’s outlook:

The above shows us that the multi-year uptrend has gotten ‘messy’ in 2015 as what was a clean channel leading into the start of the year erupted to the upside and has since fallen sharply lower.

Interestingly it could be argued that the current declines actually reinforce the longer-term uptrend pre-2015 by taking us where we should be had the initial rate of accent been maintained.

Either way, the pound to euro conversion is at a cross-roads as we are at the bottom of the upward sloping channel.

The pound will need to bounce higher or will at risk of negating the longer-term technical move higher.

This is where fundamentals step into the picture. The current juncture for sterling/euro equates to a key moment for the Bank of England which is seen to be on the cusp of raising interest rates.

We fell that should, in coming weeks, the case for a March/April rate hike be made the pound could pick up on its journey higher.

The other factor that could lead to such a move is the ECB which may indicate it is willing to add to its asset purchase programme.

This could well trigger some broad-based euro weakness and confirm the validity of the move higher in GBP/EUR.