Pound Euro Exchange Rate: GBP-EUR Stabilises at 1.2, Can Industrial Production Provide Support?

The pound to euro exchange rate has suffered 4 days of declines but we see a strong level of support ahead which could halt declines.

Tuesday sees the GBP-EUR find support around the 1.2 level. This serves to remind us that markets will be nervous to push the pair below what has proven a formidable support and resistance area in the past. Tuesday's agenda has more to offer the UK currency, and good Industrial Production data could further cement support.

Monday saw further declines in the pound to euro exchange rate; in morning trade GBP-EUR was seen 0.5 pct in the red having reached 1.1990.

The aggressive moves higher in the entire euro exchange rate complex has been eye-opening and stems from events at the ECB last Thursday.

However, respite could be offered by the 1.2 support area; which the rate is currently flirting with.

As the graph shows, it has been a level that has offered both support and resistance to the GBP-EUR on multiple occasions in the past.

"The pound continues to lose ground against most of its major currency pairs and a light calendar in the days ahead will make it even more difficult for the pound," says Sasha Nugent at Caxton FX.

Outlook still favours the GBP

Despite the recent EUR dominance, a number of analysts still fancy the GBP and say the outlook should favour the UK currency.

In a morning note on the EUR-GBP UBS say:

"The latest bounce doesn’t yet change the bearish picture as long as resistance holds at 0.8350. There’s scope for weakness in the near-term to break below support at 0.8158 and then onto test 0.8082."

Backing this assertion is UniCredit who see the EUR-GBP running into resistance, "we still do not see greater EUR-GBP upside potential above 0.83."

EUR-GBP at 0.83 = 1.20 in GBP-EUR terms.

The euro remains bullish

However, markets are currently in no mood to sell the euro, and further strength cannot be discounted.

Driving the complex higher is the euro dollar rate:

"On Friday, EURUSD spiked to 1.3915 (highest since October 2011) on surprising German industrial production release, and then entirely wrote-off gains as the US printed significantly higher than expected increase in nonfarm payrolls in February. The ECB inaction strengthened the bullish trend building since February 1st. Option bids trail above 1.3825, eyes are set to 1.4000," says a morning briefing from Swissquote Bank.

Why is the euro stronger against the pound?

The ECB left key interest rates on hold last week, but more interestingly ECB President Draghi continued to sit on the fence in his accompanying press conference saying that the inflation outlook is currently no worse than it was last month and pointing out that there had been normalisation in short-end money markets.

"There were some growing expectations heading into the press conference that Mario Draghi would announce a suspension of the bank’s Securities Market Program (SMP), a government bond purchase facility that has been in place for almost four years. He didn’t, instead saying that the bank will continue to monitor the situation and that sterilisation remains an option," note UKForex in a note on the matter.

According to UKForex, a lack of any action and the failure to signal future action saw EUR/USD gap higher through stops under and over 1.38 and onwards to a high of 1.3872.

"Not everyone is totally convinced MD will be able to keep kicking his can down the road and that at some point soon action will be needed to stave off the threat of deflation. We’ll see. The single currency rallied across the board yesterday on the news, with EUR/GBP trading to a high of .8293, this after starting the day at .8205," says the note.