Euro Rate Today: EUR Slammed by GBP and USD as Eurozone Peripheral Bonds Head to Crisis Levels

The British pound (GBP) has finally caught a break against the euro this Thursday as markets are forced to grasp the problems facing the Eurozone.

A slump in the EUR comes as Greek, Italian, Spanish, Portuguese and Irish bond yields spike higher in moves reminiscent of the bad-old-days of the Eurozone crisis.

Only this morning we were commenting on the strength being displayed by the euro dollar and euro pound exchange rates and even suggested the euro's woes may be over for now.

However, the resillience of the euro in the face of falling markets and plummeting sentiment had begun to look a little suspicious, particularly against the pound whose economy is outperforming that of the Eurozone.

Some big names then decided in mid-morning London-time that sustaining the euro was unfeasible and pressed the sell button:

• The euro to pound sterling exchange rate (EUR/GBP) is trading 0.51 pct lower on a day-to-day basis having reached 0.7973.
• The pound to euro exchange rate (GBP/EUR) is trading at 1.2542.
• The euro to dollar exchange rate (EUR/USD) is 0.28 pct lower at 1.2800.

Note: The above quotes are taken from the wholesale markets, your bank will affix a spread to the rate at their own discretion. By actively seeking out a better rate with an independent FX provider you could get closer to the market and save up to 5% more FX in the process. Please find out how.

A Modicum of Support for GBP

A stack of woes have beset the pound - while they are nowhere near as concerning as the fundamental issues facing the Eurozone markets are showing a firm intent to re-rate their valuation of the UK currency.

On Wednesday it was announced that UK unemployment has fallen faster than expected to reach 6%. Wages grew by 0.7% year-on-year in August confirming the gap between inflation and pay is finally closing.

Despite that good news there was little support for the sterling.

However, longer-term this confirms the UK economy is likely to continue out-performing its Eurozone rival and should keep a longer-term uptrend in GBP/EUR intact (downtrend in EUR/GBP).

The current levels therefore make for interesting levels for traders and currency buyers alike who have requirements on this pair.

Germany Slows Down, But Will the ECB Act? 

There is little question - the eurozone is struggling - the important German ZEW expectations index plunged to -3,6 in October from an earlier 6,9 - just another reading that would suggest the very real prospect of a German recession ahead.

"As if that wasn’t enough to get worried on the deterioration of euro area macro outlook, Eurostat industrial production data recorded a larger than expected drop (-1,8% m/m) in August (after a downwardly revised +0,9% in July). The contraction in manufacturing was even sharper -2.1% m/m on the back of a -4.8% m/m plunge in the capital goods sector (which we know is largely due to a correction of one-off factors in Germany)," notes Anna Grimaldi, Senior Economist at Intesa Sanpaolo.

The August data leave Euro area industrial production on course for a 0.6% q/q decline in September.

However, the euro's resillience against the British pound will likely come from the belief that the ECB is unlikely to act on the deteriorating situation.

No ECB action = a firmer euro.

Grimaldi says:

"Current euro levels are well below the level of 1.34 (vs USD) incorporated in ECB’s September estimates. Thus, the ECB might still be comfortable with its inflation estimate and confirm them in December.

"We expect the ECB to reaffirm its firm intention to provide additional unconventional stimulus without announcing any new measures in the short-term or before mid-2015 (especially with the EU Court of Justice deciding on the legitimacy of the OMT).

"Hopefully the weak data will at least prompt the ECB to be more active with its private assets purchases programs."

If so, then the EUR could come under pressure vs the GBP.

UK Inflation Falls - Pound Sterling Slumps

So while the euro faces little potential negative action at the ECB, the pound sterling has been hit with its own negative news.

UK inflation fell to 1.2% year-on-year in September, this shocked analysts who had predicted a reading of 1.4%.

Falling inflation is great news for the UK consumer - and it also gives the Bank of England no reason to raise interest rates any time soon and is therefore bad news for those looking for a higher GBP.

The expectation that interest rates will rise early in 2015 was behind much of GBP's rally in 2014.

Now that the Bank is no longer under pressure to raise rates investors are seeing little need to buy sterling in anticipation of a higher yield.

As such, the pound euro exchange rate could continue to slide as investors pare back their exposure to the GBP/EUR.

We also note that from a technical perspective GBP/EUR struggles when it comes to challenging the 1.28 level. It was rejected here back in August 2013.

It will take a run of strong UK data that will convince the markets and Bank of England that the UK economy requires higher interest rates to cool the economy for the pound euro to crack through the 1.28 ceiling.