The British Pound caught a bid against the Euro, Dollar, and other major currencies ahead of the weekend in a move that defied softer stock markets and concerns for future supplies of COVID-19 vaccines into the UK.
The Pound saw an especially sizeable advance against the Euro on Thursday of three-quarters of a percent, as it recorded a high of 1.1674 and extended the gains into Friday to reach 1.1677 at publication.
The gains mark a turnaround for the Pound, which has endured weakness over recent days, and a return to winning ways suggests the broader 2021 trend of appreciation might be ready to reassert.
The month’s high is located at 1.1718.
Investors pressed the pause button on Sterling’s advance in March. A period of consolidation ensued on several major Pound exchange rates, most notably the Pound-Dollar rate, allowing previously overbought conditions in the UK currency to unwind.
Technical analysts have said that when a trend becomes overbought, it can become prone to an unwind in which investors book profit, the price action in Sterling over recent hours gives some credence to this view.
Analyst Francesco Pesole at ING Bank says valuation is now no longer a headwind to further gains in the Pound-to-Euro exchange rate (GBP/EUR), which could allow further gains to be realized.
“Despite its recent woes, GBP short-term fair value has improved vs. EUR,” says Pesole in a recent client briefing note. “While GBP has struggled lately, we note that its short-term financial fair value has improved vs. EUR over the past 2 weeks, by more than 1%.”
ING analysts note similar dynamics in EUR/USD, where short-term fair value has declined lately, “clearly pointing to EUR issues as its fair value deteriorated,” says Pesole.
The analyst says that with GBP/EUR now longer meaningfully overvalued (in fact now close to its fair value of 1.1574), the door opens to further eventual advances in the exchange rate towards their forecast target 1.1765.
Technical evidence of Sterling being overbought was flagged by the Relative Strength Index (RSI) on the daily chart of GBP/EUR (lower panel) after it started recording levels above 70 for much of February and again in early March:
An RSI above 70 is considered a signal that a financial asset has become overbought, and consolidation will ultimately allow the RSI to revert to the trend zone between 30 and 70.
The above chart shows that the RSI has eased lower once more, but at 58.60 momenta, it is still positive and continues to advocate for further advances in the GBP/EUR exchange rate.
From a fundamental angle, a potential ban or limit on vaccine exports to the UK from the EU has been credited by numerous foreign exchange analysts we follow as behind a recent decline in the value of the British Pound. However, this fear is potentially overblown.
ON WEDNESDAY, the UK and EU announced they would work together on ensuring the continued flow of vaccines and vaccine inputs between their borders. However, any negotiations will likely inevitably result in the UK ceding some stock to the EU that might have previously been destined to the UK.
Nevertheless, the UK has already provided one dose to over half the adult population, leading the government to maintain the country is on track to exit lockdown according to their established timetable.