BEST Pound Euro Exchange Rate Since November 2012; Forecasts Warn of Near-Term Profit-Taking

The pound to euro exchange rate is seen at 1.2535 over the weekend; the pair shot higher overnight when the Governor of the Bank of England warned markets of an impending interest rate rise.

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What is pushing the British pound higher against the euro?

Carney’s comments at the Mansion House indicating that UK rates could rise sooner than the markets expect propelled GBP sharply higher.

The GBP to EUR pair has powered through the 1.25 point. 

Meanwhile we are within touching distance of the 1.70 level in GBP/USD.

"While Carney provided no detail of how soon rates could rise, it is unlikely that he would have made such a bold statement without a real possibility that rates could rise this year. From here, the 1.70 level is the next target and seems likely to break today. Though moves beyond this may still prove difficult, yield spreads do suggest scope for gains and we would expect the pound to hold above 1.70 by the end of the day," say Lloyds Bank Research.

BUT - beware - the Relative Strength Indicator on the short- to medium-term timeframes on the GBP/EUR charts are warning of overbought conditions. The RSI reads well above 70 on the daily charts, thus we would expect a pullback to occur at some stage.

Any declines are forecasted to be shallow.

UK employment data provides support

Meanwhile, the UK economy continues to play its role in supporting the currency.

Official data showed that the jobless rate fell to a five-year low of 6.6% in the three months to April. The number of people claiming job seekers also showed a better than consensus figure, where claims fell to -27.4k compared to -25k predicted.

"This upbeat labour data showed the country's economic recovery is thriving which, in turn, boosted expectations that the Bank of England would raise interest rates sooner than initially expected," says a note on the matter from International Foreign Exchange.

British pound spikes to 18 month high versus the euro

"After the data the pound spiked to an 18-month high of €1.2413 after opening at €1.2367. The pair have opened this morning at 1.2430, with support and resistance at 1.2423 and 1.2445 respectively," say IFX.

Beware of a short-term correction lower

This has been an outstanding week so far for those looking to buy euros with their pound sterling - your money truly does now go further!

But, it must be noted that after such a strong run pullbacks are bound to occur.

We look at the Reltative Strength Indicator (RSI) on the near-term dated charts to try and understand if the exchange rate pair is over-bought or not.

A reading above 70 is typically seen as the level at which a financial product is considered overbought as sustaining such a reading is historically proven to be unsustainable.

The RSI on the daily GBP/EUR chart is currently reading at 75.3, it is therefore well above the overbought threshold.

There is however no formula for predicting when a move lower will happen, rather it is worth keeping in mind that the probability of a pullback is now possible.

Sterling exerts upside pressure as markets gear up for rate hike

The pound saw its bullish tone remain intact as strong employment data showed that the unemployment rate fell to 6.6%, its lowest level in five years and employment rose by its largest margin since 1971 over the past three months.

As expected, Jobless Claims also fell in May to its lowest level since October 2008 as signs of economic recovery across the majority of sectors in the UK continue to emerge.

There have however been growing concerns regarding the deep structural issues in the UK housing market and its potential threat to the stability of the nation's economy.

"Ben Broadbent, a BoE policymaker, did however ease some tension by stating at Wednesday's Treasury Committee meeting that the recent housing market upturn was less debt fuelled than we have seen in the past. With Carney speaking later on this evening, we could see some further price action if any signs of hawkish sentiment surfaces from the BoE Governor's comments," says Kamil Amin at Caxton FX.