GBP to EUR: 1.20 Seen Capping Advance

Modified: Wednesday, 10 May 2017 12:55 BST

Pound Sterling retains a positive bias against the Euro with the GBP/EUR exchange rate rising half a percent to 1.1897.

However, a noted technical analyst continues to warn that upside attempts will likely be capped by the supply in Sterling located around and just above 1.20.

"The secondary failure above 1.2000 has evidently capped GBP advances for now and while re-emergent weakness still looks part of a broader range for now scope exists for further erosion over coming sessions," says analyst Lucy Lillicrap with Associated Foreign Exchange in London.

Indeed, Lillicrap says values are effectively still pivoting 1.1650 or so in monthly terms and additional downside retracement would not surprise before buying interest is found again.

Lillicrap is looking at this exchange rate from a longer-term perspective and sees downside should Sterling once again fail to breach 1.20 and rally higher.

"Local selling pressure now exists around 1.1900 and no obvious path is open back toward 1.2050 while below here," warns Lillicrap. "Meanwhile an extension nearer 1.1640/50 then 1.1500/10 is feasible first/next."

Data in the Pound's Favour

Broadly-speaking, Sterling continues to be driven by external factors rather than by UK specific issues.

"The Brexit quarrelling between the EU and the UK has eased a bit. This might be a slight help for Sterling," says Piet Lammens, an analyst with KBC Markets in Brussels.

That said, the UK currency did however receive a fillip from a retail sales report from the British Retail Consortium (BRC) showed a higher-than-forecast increase in sales in April which helped allay concerns about a slow-down on the high street.

Recall the UK consumer is the engine of the country's economy and must keep spending in order to maintain solid growth rates.

The BRC Retail Sales Monitor showed a surge of 5.6% in shop sales in April, which was well above the 0.5% forecast and the -1.0% previously.

It was the strongest result since April 2006, but the BRC pointed out that the data was “positively distorted” due to the timing of Easter.

GBP/EUR rose moderately following the release, appreciating from the 1.1840s to 1.1872 as the results had boosted confidence in the UK economy.

The data came as a surprise given the low -1.7% fall in retail sales as measured by the ONS in March, and the general perception that shoppers were tightening their belts due to higher good’s inflation brought on by the weak pound.

Helen Dickinson, Managing Director of the BRC, pursued a cautious line in her commentary saying almost all the gains were due to the effect of Easter coming in April.

“The positive distortion from the timing of Easter was largely responsible for the month’s growth and looking to the longer-term signs of a slowdown, the outlook isn’t as rosy,” she said.

Dickinson also highlighted the fact that most of the sales growth had been in food sales with non-food showing slowdown

This suggests shoppers may be retrenching to essential food items rather than spending on usually more expensive non-food items and capital goods.

“Consumer spend on food and non-food items is diverging. Food categories continue to contribute the most weight to overall growth, although food inflation has a part to play in this. Meanwhile, consumers are being more cautious in their spending towards non-food products and focussing more on value priced lines,” said Dickenson.

The three-month average of BRC sales, however, which is free from Easter distortions, showed a strong rise from -0.7% to 1.4%. A point highlighted by Capital Economics’ Ruth Gregory, who added it was nothing like the “squeeze seen after the financial crisis.”

Ruth Gregory at Capital Economics added it was nothing like the “squeeze seen after the financial crisis.”

The Pound rose steadily after the data release appreciating from 1.1842 to a peak of 1.1872 seven and a half hours later; it then fell back down to 1.1847 before rebounding currently back into the early 1.1860s.

The Euro, meanwhile, traded much lower despite the pro-European Emmanuel Macron winning the presidential election as traders had already bought heavily into the election, betting he would win, such that the event had already been priced into the exchange rate which was then made vulnerable from profit-taking.

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