Pound to Euro Rises on Morning of Referendum Day

The British pound rose a quarter of a percent on the start of the Referendum day, as invetsors bet heavily on a win for 'Remain'

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The pound rose by a quarter of a percent against the euro on Thursday morning as markets began to price in a win for 'Remain' at the UK's EU membership referendum.

GBP/EUR rose to a high of 1.3084 in overnight trade as investors bought increasing amounts of the pound in the expectation that the referendum would result in a win for those wanting to remain in the EU

The exchnage rate is not near to our 1.3100 confirmation level, which if surpassed, will porbably signal more upside to a probable target at 1.3200, and then 1.3500 in the event of a referendum win.

Pound rebound's from Wednesday's pull-back

Thursday's recovery came after sterling lost ground on Wednesday, following the release of a poll by polling agency Survation for the IG Group, which showed Remain's lead shrinking to only one point.

Excluding the undecided voters that would lead to the narrowest of wins for 'Remain' of 51% to 49% for 'Leave'.

It now also appears betting odds showing a consistently higher chance of a win for Remain may have been somewhat misleading, since they are based on "weight of money" rather than number of bets, and whilst more money has been betted on the UK remaining, more bets have been cast in support of leaving.

Increase in brexit risk sinking this week's rally

Sterling's pull-back will come as no surprise to those, such as Commonwealth Foreign Exchange who issued a cautionary note to clients recently, saying that each poll could cause volatility in sterling.

"Markets remain hyper focused on every poll, headline, shift in sentiment and even on potential changes in the U.K.’s weather on the day of voting. Any perceived increase in Brexit risk is likely to quickly sink this week’s rally in the pound and in risk assets like stocks and commodities." Siad the note.

Sentiment could slip at anytime, but the next target for GBP/EUR is still higher for now, at 1.3200 where the 200-day moving average is situated - a formidable obstacle to further gains.

However, it has reached tough resistance from an old trend-line (blue line on chart) and could pull-back in the immediate future before pushing higher again.

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A break above the 1.3100 level would probably confirm the continuation higher to 1.3200.

Support for any pull-back would probably kick in at around the 1.2900 mark, where the monthly pivot is situated.

The MACD indicator in the bottom frame is now above the zero line, further supporting a bullish outlook.

British Pound in Historic Comeback

GBP strengthened sharply at the start of the week, gapping up in most pairs, after three polls over the weekend showed the 'Remain' campaign extending their lead in EU referendum polls.

Importantly, betting markets have veared sharply in favour of the Remain vote carrying the day with the much-watched Betfair marketplace showing there is now a 78% chance the UK will vote to stay within the EU. 

Compare this with the lows that saw a 58% chance last week. No wonder sterling plumbed the lows it did. 

So what we could be witnessing at present are traders rushing to profit on a Remain victory before the move fizzles out; there is a risk that the GBP hardly moves a jot following a Remain win in five days time!

In the pound to euro pair there is a strong possibility that should the exchange rate be able to move clearly above the 1.2940 level it will confirm a continuation up to the 1.3000 handle, which is a key psychological level.

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This view is echoed by analyst Asmara Jamaleh at Intesa Sanpaolo who has updated with his target levels ahead of the EU vote results:

"If the Remain campaign prevails, the pound’s immediate reaction, on the other hand, should be a rebound, against both the dollar (initial upside towards GBP/USD 1.50) and against the euro (initial upside towards 0.75 EUR/GBP)."

0.75 EUR/GBP equates to 1.33 in GBP/EUR terms.

The pound is also rising strongly versus the dollar, after having gapped up above the 1.44 level overnight, and back above a key trend-line, renewing the bullish outlook for the pair. 

The pair is approaching a major obstacle in the form of the 200-day moving average (MA) at the 1.4680 level, with further resistance kicking in at the 1.4700 level from the monthly pivot, a level where traders often cluster orders counter to the dominant trend, which will probably result in a loss of upside momentum for GBP/USD.

Lloyds Bank's Robin Wilkin's is meanwhile suggesting gains would be capped at the previous 1.4670-1.4770 highs.

"An aggressive 3-day turnaround from Thursday's low at 1.4013 to an overnight high of 1.4623 is testament to the low liquid environment we are in. 1.4350/30 remains the pivot in this current range. Intra-day momentum is still positive, but nearing over bought, so a re-test of the 1.4670-1.4770 previous highs is possible, but we expect the upside to be limited to there."

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The euro to pound pair has fallen to a strong support line at 0.7742 provided by the monthly pivot.

This line has so far prevented further declines.

The pair may well stabilize at this level, because even if it breaks through 0.7742 there is further support down at 0.7733 from a legacy trend-line.

Commerzbank's Karen Jones is still bullish, as long as the pair remains above the 0.7736 level:

"It will need to go sub .7736 (26th April low on a closing basis) to alleviate upside pressure.  Meanwhile we remain unable to rule out a retest of nearby resistance lies at .7998/ the 78.6% retracement. This is the last defence for the .8116 April peak."

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Goldman Sachs Strategists Look to Chase Pound Even Higher in Wake of Remain Victory

Looking to the post-referendum world, strategists at Goldman Sachs believe one of the best ways to chase the relief trade is to buy the pound and sell euros.

In a strategy note to clients analyst Silvia Ardagna says

"The EUR should weaken versus Sterling. When EUR/GBP stood at 0.76, we quantified the 'Brexit' risk premium at around 5-8 big figures. Since then, EUR/GBP has moved up almost another 3 big figures.

"Hence, in a 'Remain' scenario, EUR/GBP could move sharply towards our 12-month forecast of 0.70."

0.70 in GBP/EUR terms is 1.4286.