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Stay Vigilant, a Break of the British Pound and Euro's Range is a Risk say Lloyds



- Lloyds Bank expect Sterling to remain rangebound, but are wary that a big break is coming

- GBP/EUR market "is engaging in self-fulfilling prophetic behaviour"

- "when the range breaks, there is a significant risk of price action trending aggressively"


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Pound Sterling has fallen for three days in succession now and is quoted at its lowest level in ten days against the Euro.

Yet, at 1.1340, the GBP/EUR is well within the bounds of familiar levels as the exchange rate continues to trade a six-month range that is identified as being close to the narrowest in its history.

The 2018 range can be defined by a number of levels, depending on who you ask, but it's safe to say it can be defined as broadly lying between 1.16 at the top and 1.1150 at the bottom:

All the more remarkable, the range comes despite ongoing angst concerning what the final Brexit deal will look like and despite periodic political jitters coming out of the Eurozone; one would expect such political uncertainties on either side of the channel to really shake the market in favour of one currency or the other.

Over the past six months we have had concerns over the shape of the new regime in Italy, a change of guard in Spain and more recently uncertainty as to the longevity of Angela Merkel's ruling coalition.

Concerning Brexit, the pace of negotiations remain frustratingly slow and the market remains subject to spasms of doubt that a final deal is achievable, for example owing to the seemingly unsolvable contradictions presented by the Irish border. And then there are concerns that the Prime Minister's tenure at the top will be short-lived owing to her waifer-thin majority in parliament that often appears susceptible to her own party's disagreements as to what Brexit should look like.

Distill all of the above into the Pound-to-Euro exchange rate and is it actually any wonder the pair is going hideaways? "There is a high degree of uncertainty surrounding key binary-type event risk (Brexit), reducing the medium-term directional conviction among corporate and institutional participants. This phenomenon is also well observed in analysts’ sentiment," says Gajan Mahadevan, a Quantitative Strategist at Lloyds Bank.

Mahadevan is also of the opinion that "the market, to an extent, is engaging in self-fulfilling prophetic behaviour" thanks to "strong technical support and resistance regions combined with historically low volatility".

This in turn drives expectations that price action will remain subdued, and "creates a feedback loop that increases the market’s confidence that range parameters will hold."

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