A shock crash in the Pound sent GBP EUR -2.2% lower recently, pushing Sterling further into oversold territory.
Flash Crash Crumbles Pound; Will Oversold Sterling Manage a Recovery?
Data from before the flash crash showed that a new record number of FX speculators were holding short positions against the Pound, with the quantity of bets against GBP climbing over 97,500. This means that the markets are expecting the Pound to fall much lower, but eventually these investors will need to close their positions by rebuying the Pound up from its lows. This suggests there will be a floor under the Pound in the near future; although it remains unclear what the source of Sterling support will be that would trigger such a buy-in.
The Bank of England (BoE) is one likely source, considering the latest strong PMI rebounds have indicated that the Monetary Policy Committee (MPC) may have less of a case for easing policy further. With the recent PMIs hitting 55.4 for manufacturing, 52.3 for construction, 52.6 for services and 53.9 for the composite, markets are even beginning to entertain the possibility that the MPC may lift interest rates back to their pre-referendum levels.
Euro Buoyed by Talk of ECB QE Taper; Deutsche Bank Fine to be Settled Favourably?
The Euro has been supported recently by rumours that the European Central Bank (ECB) may be planning to taper its bond purchases. This would mean the Governing Council intends to wind down its quantitative easing programme, the size of which has become a considerable concern to many investors and market commentators. The tightening of stimulus measures would support Euro exchange rates higher.
Conversely, however, fears over the German banking sector continue to weigh. Despite a meeting with the US authorities, Deutsche Bank head John Cryan has so far been unable to negotiate a lower settlement than the US$14 billion fine currently levied. If there were no signs that the Department of Justice (DoJ) intends to move from its position, the Euro may find the pace of gains significantly slowed.
GBP EUR Long Term Exchange Rate Forecast; Pound is Significantly Oversold
At the time of writing the GBP EUR exchange rate’s relative strength indicators had fallen to 22.78; below 30 is considered oversold. This is yet another suggestion that the Pound is due a sharp upwards correction, although whether that will happen in the near-term or further afield is hard to discern at present.
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