Pound Sterling Today: Is “Remarkable” GBP/EUR Range Ever Going To Break?

Endless sideways chop in Pound/Euro exchange rate

Rates today at Euro Fx

Euro = 0.860

Stg = 1.1150

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British Pound exchange rates fared a little better to close the week, but as Pound/Dollar struggled to outperform EUR/USD, Pound/Euro was an underperformer on Friday. This week sees an important week for the Pound as investors scepticism over the Bank of England’s appetite to hike rates will either play out or be replaced with more optimism that the 70% probability of an increase before November could come to fruition. Lloyds recent report on the Pound/Euro pair provides a fascinating insight into just how strange it is that the pair has been so stuck given all the risk factors currently in play, outlining the three key uncertainties it faces,

“Given the risk factors in play – which include swings in Brexit sentiment, fluctuating Bank of England (BoE) and European Central Bank (ECB) policy expectations and political instability in Spain, Italy, and Germany – it is perhaps remarkable that GBP/EUR has remained within its 1.1070 to 1.1540 medium-term range.”

So what does the future hold for the Pound in particular? Well, in Lloyds view, the range should continue to hold and thus they have very humble forecasts for the pair at the end of this year and next. Regardless of this, however, Lloyds believe that risk remains elevated despite the low volatility environment the pair has been trading in,

“Given the likely oscillations in expectations around opposing risk factors, we continue to expect this range to hold, forecasting 1.10 for end-2018, and 1.09 for end-2019. That said, the current climate raises the question ‘can a currency, contained within a range, still be risky?’ In short, yes. “

Lloyds urge vigilance when trading Sterling vs the Euro

The lack of a change in the fundamentals may be proving to be constrictive for Pound/Euro, but the nature of balance like this is it can often catch markets off guard, and a build up of stop losses on either side of the range can often exaggerate a break-out. Lloyds are advocating for constant vigilance seeing risks for both the Euro and Pound,

“For us, the key is to monitor the balance of risks. Currently, risks to the GBP/EUR appear to be roughly offsetting, but that may not remain the case. The fact that these drivers could converge at any point in time, to either support EUR or GBP, means we must remain constantly vigilant, especially as the tendency following a break of an entrenched range is for a marked price move.”

Thus the conclusion appears to expect more of the same but don’t be surprised if something happens and sparks a violent bout of volatility. Probably wise words, but with the ECB and BoE likely working closely to try and subdue any major shocks, the catalyst will probably come from outside the sphere of monetary policy.

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