Great Comeback for GBP/EUR, But GBP/USD Prone to US Political Newsflow

The British pound sterling (Currency:GBP) has seen heightened volatility on Tuesday. News that UK inflation did not fall over the course of the last month got the GBP buyers stirring. However, the big talk of the currency markets concerns an agressive comeback by the US dollar. All the details below.

Exchange rates at last posting:

• The pound sterling to euro exchange rate is 0.23 pct higher on last night's closing rate at 1.1820.
• The pound sterling US dollar exchange rate is 0.33 pct lower on Monday at 1.5929.
• The pound to Australian dollar is 0.7 pct lower at 1.6731.
• The pound to New Zealand dollar is 0.44 pct down at 1.9046.

Please note that your bank will access the above market rates but will sell on currency to you at another rate; this spread is where they make their money. However, an independent FX provider can also access currency at the above rates BUT will actively undercut the offer made by your bank, thus delivering you up to 5% more currency. Please find out more here.

16:45: Watch out for employment data tomorrow

Wednesday is all about employment data; remember the Bank of England is targeting an unemployment rate at 7% before they consider tightening monetary policy, thus any improvements in the UK employment situation could hasten the tightening, a pro-GBP outcome.

Claimant Count Change (Sep) is predicted to come in at -25K, i.e 25 less people receiving unemployment benefit.

Last month the figure fell by 32.6K.

The headline ILO Unemployment Rate (3M) (Aug) rate is predicted to remain at 7.7%.

16:30: Confirmation that EUR weakness is external

In line with our comment at 16:14, Joe Manimbo at Western Union says:
"The tentative battering received by the euro seemed akin to a psychological correction rather than a reflection of fundamental trends in the 17-member union."

The question is whether traders will follow a new trend lower for the euro, or will the currency rebound the second UK inflation data is forgotten and the US fiscal issue wanes on the headlines?

16:14: Great comeback by the GBP/EUR

The pound / euro rate is powering ahead; the UK currency now buys 1.1833 Euro.

There is no clear driver for the euro's weakness - we would attribute the decline in the EUR to:

1) Weakness on the secondary EUR/GBP cross rate - this weakness came in at 09:30 with the release of strong UK inflation numbers.
2) The headline EUR/USD rate has fallen in line with pro-USD news coming out of the US.

So while there is nothing necessarily wrong with the euro we note it is susceptible to the 'other side' of the equation.

16:09: Pound trading on minute-by-minute news out of US

The pound to US dollar rate is notably prone to events in the US.

Omer Esiner at Commonwealth Foreign Exchange:

"Data showed that Britain’s consumer price index came in at 2.7%(y/y) in September, confounding expectations for a slight drop to 2.6%(y/y). Higher inflation is likely to add to the growing list of indicators that argue for no new stimulus from the Bank of England. The pound however, continues to trade on minute-to-minute developments in DC. While a short-term deal could lift the dollar further, its upside could be limited if the agreement is seen as a short-term fix."

14:20: "A shift to strong selling pressure"

Matt Weller at GFT:

"After briefly bouncing above 1.6000, the GBP/USD has also fallen sharply in today’s early European trade. Rates just put the finishing touches on a large Bearish Engufling Candle, suggesting a shift to strong selling pressure heading into today’s North American session trade.

"Like the EUR/USD though, rates are currently testing a major previous support level, in this case at the recent lows around 1.5925; a break through this floor later today would open the door for a continuation into the mid-1.5800s next, so traders should keep a close eye on this level in today’s trade."

11:23: GBP in sudden plunge against US dollar

"The dollar suddenly gained ground in mid morning European trade today as both EUR/USD and GBP/USD plunged more than 50 points in a matter of minutes despite relatively buoyant eco data from both regions. The move higher in the buck was likely caused by growing speculation that US legislators were getting close to a compromise on the US budget and debt ceiling deal with GOP expected to caucus at 1500 GMT today." - Boris Schlossberg at BK Asset Management.

11:05: GBP bulls attack, but aggression kept in check ahead of tomorrow's employment data

Ipek Ozkardeskaya says today's British pound recovery will be capped:

"Released in the morning, the UK’s September CPI reading was higher-than-expected and gave a reason to GBP-bulls to attack the resistance at 1.6000. A higher inflation revived the anti-Carney trades: short BoE’s forward guidance/inflation knock-out framework, long GBP.

"Technically, the bearish pressures are likely to limit the upside in the Cable but the option bets trail above 1.6025 ahead of the jobless claims scheduled tomorrow. The jobless claims are expected to have regressed (from -32’600 claimants to -25’000 in Sep); if true should reinforce the selling pressure in GBP.

"The 30-day mid-Bollinger band is still the reference support, if breached should deepen the damage to the recently violated uptrend channel.

"Looking at EURGBP, Jul-Oct downtrend top (broken on October 9th) is seen as the next key support at 0.843500. Traders are likely to remain on the long side of the play."

09:42: GBP rallies in wake of inflation data

The reaction to today's inflation data has been positive. High inflation will likely push the hand of the Bank of England MPC to hike interest rates sooner than they are currently prepared to.

Below is GBP/EUR's reaction:

09:30: Inflation numbers come in higher than expected

Consumer Price Index (YoY) (Sep): Comes in at 2.7%, unchanged on last month. Beats expectations for a fall back to 2.6%.

Consumer Price Index (MoM) (Sep): Comes in at 0.4%, unchanged on last month. Expectations were for a reading at 0.3%.

Core Consumer Price Index (YoY) (Sep): Comes in at 2.2%, last month this read at 2%.

08:40: Today's GBP/USD outlook

ICN Financial Markets give us their view on the outlook for the pound dollar pairing today:

"The pair is still trading with upside bias due to stability above 1.5940 -38.2% correction - and above Linear Regression Indicators. Nevertheless, we still see trading below 1.6060 as negative and stability below it favours the extension of the downside correction. A breakout below the uptrend support and RSI failing to hold above 50 support our bearish outlook.

"The trading range for today is among the key support at 1.5800 and key resistance at 1.6085.

"The general trend over short term basis is to the upside as far as areas of 1.5280 remains intact targeting 1.6540."

08:15: The key inflation numbers market players will be watching

Today is all about inflation for the British pound sterling (Currency:GBP).

But there are three headline releases that traders will be watching out for:

Consumer Price Index (MoM) (Sep). Consensus estimates are for +0.3%, lower than last month's +0.4%.
Consumer Price Index (YoY) (Sep). Consensus estimates are for +2.6%, lower than last month's +2.7%.
Core Consumer Price Index (YoY) (Sep). Last month this came in at 2%. Consensus estimates pending.

Generally, a high reading for the above is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish).