Euro/sterling parity push faces 95 pence chart hurdle

The euro's rally to a 6 1/2-month high against sterling this week points to more gains and even the prospect of parity, but key to a significant move higher is whether it can break above the 95 pence area.

Sterling has taken a beating in the past month, particularly versus the euro, falling as low as 94.13 pence this week, and many analysts expect it to fall further in the medium- to long term.

Chart-watchers say the next big technical focus in euro/sterling's upward path lies around 94.90-95.20 pence.

At the same time, they acknowledge that a short-term correction is under way. Investors scrambled on Thursday to cover overstretched short positions in the UK currency and some technical analysts see a slide to as low as 90 pence before the euro resumes its upward trend.

The 94.90 and 95.20 pence levels mark the highs euro/sterling hit earlier this year, when traders twice took a stab at pushing the euro up to a record high of 98.04 pence hit in late December 2008.

The market may prepare a third attempt soon, analysts said.

"The 94.90-95.20 pence is quite a key area" said Karen Jones, technical analyst at Commerzbank in Frankfurt, adding that a break above that area would open the way to a climb beyond the December 2008 high and ON pave the way to 99 pence.

Other resistance is building around 95 pence, with Phil Roberts at Barclays Capital saying the region marked the 78.6 percent Fibonacci retracement of euro/sterling's move from the December high to this year's low of 84.00 pence, touched in June. 

SHORT-TERM CORRECTION

Sterling has been battered across the board on the view that UK interest rates will stay low and the nation's public finances will deteriorate further.

While most in the market expect these issues to keep sterling under overall downward pressure, a sudden squeeze in short sterling positions pushed the UK currency sharply higher on Thursday.

Paul Rodriguez, a technical analyst at Lloyds TSB Financial Markets in London, said Thursday's move was a correction of overselling in sterling, especially against the euro, although the rebound would be short-lived.

Euro/sterling tumbled 2 percent to 91.43 pence on Thursday, its biggest one-day fall in more than six months, before pulling back to around 91.60 pence, close to where Rodriguez said the euro had been buoyed last week during its rally.

"The next support is at 91.58 pence. If we can (decisively) take that level out, there will be long positions the market will be looking to chop, and push down towards 90 pence," he said.

Despite the sudden shift in sterling's gears on Thursday, most technical analysts said a fall in euro/sterling to below 90 pence were unlikely, adding they expected the pound's selling trend to pick up around that level.

Some said a push close to parity would become a possibility within the next three months if euro/sterling broke significantly above 95 pence.

"There's no key resistance between 95.20 and 98.00 pence" said Hugues Naka, technical analyst at Societe Generale in Paris.