Pound-to-Euro Exchange Rate Unlikely to fall below 1.10 Near-Term

Image © SlayStorm, Adobe Stock

- Pound Sterling suffers sell-off in wake of Apple revenue warning

- Support at 1.10 appears intact

-1.0875 to be tested if 1.10 gives way

- Service PMI dominates economic calendar

Pound Sterling suffered a sudden and precipitous fall against the Euro mid-week as currency markets experienced a 'flash' event following a surprise revenue warning from Apple Inc., but the 1.10 support floor in GBP/EUR ultimately survived confirming to us the GBP/EUR exchange rate is unlikely to fall below this threshold in the short-term.

The Apple revenue warning cements investor concerns for the outlook of the Chinese economy, triggering a rush for the safety of the Yen and other 'safe haven' currencies such as the Dollar and Franc. Regardless of the exact dynamics, the 'flash' event sent ripples right across the global FX space.

The Pound-to-Euro exchange rate slipped to 1.0967, its lowest level since September 2017.

The move was able to transpire because markets were unusually 'illiquid' in early Asian trade, largely owing to the fact Japan is on a 4-day holiday; in such conditions unusual moves can be amplified.

The Pound has recovered to trade back above 1.10 and is therefore once more in its longer-term range. The recovery above 1.10 is crucial to Sterling's outlook. If we cast our minds back to the flash-crash centred on Sterling back in October 2016, while the currency did recover, it did so at levels lower than where it was before the crash.

Therefore, events like this, which appear to be technical in nature, can have meaningful and lasting impacts on currencies. Often sharp moves can trigger a shift in trend and over 24 hours later we can say the Pound has avoided any significant damage from the event.

For now, we are expecting the 1.10 support level to hold strong, at least into the make-or-break Brexit vote scheduled to take place in parliament in the week commencing January 14.

"Bearish risk is still being limited by demand around 1.1000 which leaves prices here effectively rangebound at present," says Trevor Charsley, a foreign exchange analyst with currency brokers AFEX. "`until/unless this psychological support point gives way no direct resumption of long term GBP weakness is likely either."

However, should 1.10 break, Charsley says 1.0875 and then the 1.0750 areas can come back into focus en-route to another test of 1.0625 (the October 2016 major low).

"However in the meantime any such sell-off could yet be postponed provided 1.1250 is hurdled first/next," adds the analyst.

Pound into Euros Payments Watch: Barclays @ 1.08

For those watching the market for the purpose of making an international payment, we a transfer from Sterling into Euros on January 03 at 11:00 A.M. - we received an approximate rate of 1.0830 from Barclays with a charge of £5.00. The spot interbank GBP/EUR exchange rate at that time was quoted at 1.1063.

At the same time, Horizon Currency were quoting approximately 1.0950, with no added charge, a significant advantage for those willing to take the time to work with a private payments specialist. See indicative retail market rates here.

Service Sector Data Beats Expectations, Help's Sterling Retain a Bid

The British Pound is seen trading with a bid ahead of the weekend, suggesting to us that the jitters sparked by the 'flash' trading event in Asia mid-week has failed to materially damage the currency's prospects.

Gains were aided by some better-than-forecast data out of the UK economy in the form of the IHS Markit Services PMI which read at 51.2 in December ahead of expectations for 50.7.

IHS Markit say lower fuel prices helped to offset some of the pressure on operating expenses from rising staff wages, however business activity rose at its slowest pace in two-and-a-half years. New work increased only marginally during December, which  contributed to a slowdown in job creation to its weakest since July 2016

Reports from survey respondents suggested that Brexit-related concerns were a key factor weighing on business-to-business spending at the end of 2018. A number of firms also noted that subdued consumer demand had acted as a brake on sales in December.

“The service sector typically plays a major role in driving economic growth, but is now showing worrying signs of having lost steam amid intensifying Brexit anxiety. The final two months of 2018 saw the weakest back-to-back expansions of business activity since late-2012 and highlight how clarity on Brexit is needed urgently in order to prevent the economy sliding into contraction," says Chris Williamson, Chief Business Economist at IHS Markit.

While the overall tenor of the report might be sombre, for currency markets that the data beat expectations is what matters, hence on net this is a Sterling-positive report.