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Low liquidity and month-end repositioning saw Pound Sterling fall 0.35% against the Euro.
The decline means the Pound to Euro (GBP/EUR) exchange rate put in one of the more noticeable moves in illiquid festive season markets and now quotes at 1.2023.
The pair is tucked below the nine-day exponential moving average (EMA), which suggests a weak near-term momentum for the remaining trading sessions of 2024.
The next target would be the graphical horizontal support area that lies at 1.20. The RSI is at 46 and pointing lower, confirming some softer momentum.
However, there are no fundamental data or developments behind the decline in Pound Sterling, which confirms price action to be purely flow-driven. Month- and year-end portfolio adjustments will be underway and are likely behind the Pound's decline.
This will combine with thin market conditions with traders away from the desk. Noticeably, the GBP/EUR decline happened on a day when both the UK and Eurozone markets were closed.
"Boxing Day in the UK and given the placement of Christmas on a Wednesday this year the volumes and liquidity for today and tomorrow are going to be quite challenged to say the least," says W. Brad Bechtel, Global Head of FX at Jefferies LLC. "We expect year-end related flows to continue to percolate into the market."
As there is no fundamental driver behind the GBP/EUR decline, we would expect it to be faded and potentially even retrace.
If this is to happen, then a recovery to the nine-day EMA at 1.2047 is possible.
Recent weakness in the Pound follows a readjustment in expectations for the number of Bank of England interest rate cuts for the coming year.
The Pound fell after the Bank indicated at its December policy update that it might cut interest rates more than markets were expecting as economic data was weakening.
This led some analysts to warn of near-term downside risks as investors 'priced in' more rate cuts for the coming year, with most economists saying the Bank will cut on at least four occasions.
"Risks are tilted in a dovish direction. This implies further modest downside risks for the pound into year-end," says Sheryl Dong, an analyst at Barclays (LON:BARC).
Although price action is proving soft at the turn of the year, the Pound remains in a medium-term uptrend against the Euro, which can resume in the new year and potentially introduce new multi-year highs for euro buyers.
Barclays continues to maintain a constructive outlook for the GBP versus the EUR on big macro trends (such as tariff resilience, EU-UK reconvergence and the pound's carry appeal).
"Longer term, we remain constructive and continue to forecast a grind for EURGBP towards 0.80 in coming quarters on big macro trends," says Dong.
"These trends include the relative tariff resilience versus the eurozone thanks to a trade deficit in goods with the US; structural supply side improvements from closer EU-UK ties; and a persistent carry advantage thanks to a slower-cutting cycle by the BOE that will likely be sustained for a while in light of ample fiscal easing in 2025," she adds.
EURGBP at 0.80 would give a GBPEUR of 1.25.
An original version of this article can be viewed at Pound Sterling Live