Pound sterling to euro exchange rate: GBP/EUR tipped to stay on the front foot, GDP numbers provide support

By Gary Howes

The British pound has advanced against the euro on Tuesday but there are growing concerns that the rally could be quashed by an uneasy Bank of England.

The pound to euro exchange rate (GBP/EUR) is trading marginally higher on Tuesday morning following today's GDP data release. The GBP to EUR is quoted at 1.2136.

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"Reasons behind a strong pound seem to be coming in full flow, and the strong UK GDP reading adds to the list of positive UK data supporting the pound. The strength of sterling has come under scrutiny recently by the BoE, and it may not be long before the central bank’s message is received and the pound gives up some of its recent gains. Given the momentum behind the pound, it is unlikely the single currency will be able to do curb losses and so the only way is up for GBP/EUR today," says a note from Sasha Nugent at Caxton FX.

The Governor of the Bank of England Mark Carney has already alluded to his concerns over the strength of the British pound; in a speech delivered in Davos last Friday he told delegates:

"The appreciation of sterling will hold back the expansion of net exports".

This small phrase could be the start of many from the Bank which will seek to encourage selling in GBP.

Luc Luyet, commenting on the outlook for the EUR/GBP says the EUR is likely to remain in negative territory:

EUR/GBP declined significantly yesterday near the resistance implied by the steeper declining trendline. Hourly supports stand at 0.8210 (24/01/2014 low) and 0.8168. A resistance lies now at 0.8306.

In the longer term, the technical structure remains negative as long as prices remain below the resistance at 0.8350 (13/01/2014 high). Monitor the support implied by the 61.8% retracement (of the 2012-2013 rise) at 0.8160. Another key support can be found at 0.8082 (01/01/2013 low).

British pound sees gains on Friday courtesy of on-target GDP data

The big news concerning the exchange rate market today is that of the release of Q4 2013 GDP data.

“Sterling saw slight gains on Tuesday morning following release of GDP growth figures for the last quarter of 2013, which came out exactly as forecasted at +0.7% for the quarter and 2.8% for the year. This was the fastest pace of growth since before the financial crisis as a combination of improved confidence, credit availability, employment growth and house price gains saw the U.K. economy buck the weak trend of European economies last year. It also demonstrates the Government’s ability to turn the economy around, whilst getting a grip on the country’s vast budget deficit," says Andy Scott at HiFX.

Sterling dipped initially to the news and confirmed our view that it will take an upside surprise to budge the UK currency higher at this stage.

Does this mean markets have fully factored in the position of the UK economy? If so, does this end the Sterling rally?

However, we must remember that the fortunes of other currencies could change. With issues in the Eurozone remaining we could see the pound to euro exchange rate advance on Eurozone weakness.

"There remain a number of ‘headwinds’ faced by the economy such as stresses in the euro zone banking markets that could see the ECB forced to act, or a slowing growth rate in the world’s second largest economy, which has been a big buyer of luxury British brands. However, we look to be on a stronger footing now and therefore able to withstand some of the drags on demand without having to fear the economy contracting. Sterling’s value should reflect this positive economic backdrop as it continues to recover from the financial crisis sell off that saw it depreciate by around 25% against many major currencies," says Scott.

For now we predict dips in the British pound to euro exchange rate will be shallow, but we may have a while to wait before we see substantial gains.

Equity markets in slight recovery, Apple Inc. weighs

We continue to see volatility in global markets which is feeding through to FX.

Ishaq Siddiqi says:

"The global deterioration of equity markets paused overnight in Asian markets, a day after stocks in the region fell to six-month lows. Slowing growth in China together with Fed’s tapering of QE prompted fresh fears about the outlook for emerging markets.

"Apple in the US reported numbers after the closing bell; a flat earnings report with the tech giant lowering its sales outlook for 2014, rattling investors – the company sold less iPhones than expected, around 51million during the period versus expectations of 55million.

"Revenues for 2014 are slightly less than forecast and worryingly, Apple is seeing a drop-off in the Americas and importantly, the Asia-Pacific region which fell by 9%. Royal Bank of Scotland shares are on the back foot, as expected, after the bank yesterday afternoon announced tat it will have to set aside around £3billion for litigation and customer compensation costs. The bank is now facing fresh pressure about its capital strength as it has to contend with these charges which will eat away at full-year earnings; markets expect up to £8billion in pre-tax losses for the FY."