Pound Holds Nerve Above Key Support v Euro

Pound Sterling is sitting on top a key make-or-break level against the Euro after being hit by a tranche of poor data that questions the notion that the economy is recovering from a soft start to the year.

Sterling-Euro fell down to close the week ending 7 at 1.13 having been as high as 1.1420 on preceeding days.

Driving the decline were economic data; the ONS reports that manufacturing production in the May period fell 0.2% on the previous month's figure. Economists had forecast a reading of +0.5% which would have signalled impressive growth.

The miss is a massive one; of the scope that tends to move currency markets.

Industrial production data shows a monthly decline of 0.1% where analysts had forecast growth of 0.3%.

And, to top of this tranche of disappointment, it has been reported the UK's trade deficit widened to £11.86BN where analysts had forecast a widening to £10.80BN.

Recall, that the longer-term stability of Sterling lies with the country’s ability to close this deficit. As long as the deficit remains as big as it is, the country will continue to rely on foreign inward investment to prop up the currency.

While this foreign investment is still forthcoming - at record levels actually - there is no guarantee that it will last.

The country really does need to become better at exporting.

And just incase you hadn’t had enough of this downcast economic news, a measure of UK house price growth hit a four year low.

According to the latest Halifax HPI release, June witnessed a monthly reduction in prices of 1% on May.

“There is no doubt that it is a buyers’ market right now in the UK, and this could be just the beginning. With poor wage growth, low consumer confidence, a shrinking buy-to-let market, and heightened prospects of a rate rise, we could be in for an extended period of weakness in the UK housing market,” says Joshua Mahony at IG in London.

Can the Bottom of the Range Hold?

The fall against the Euro is still however well contained and our studies suggest for those caught out by the move lower it is still too early to panic.

Ultimately, Sterling comes at a time when Sterling trades a tight range against the Euro.

The market has been stale, to say the least.

We are witnessing a prolonged period of compression in-between the 1.13 and 1.14 band and there is little evidence that any directional move out of this band is likely anytime soon.

While excitement is certaintly lacking, the relative calm does have one positive side effect in that it allows those with big-ticket international payments to make decisions with a little more certainty than would normally be the case.

For example, bank accounts have been offering transfer rates of between 1.0940 and 1.1050 for some time now, while independent providers continue to offer rates above 1.1230 meaning securing the best rate is now more of a shopping exercise than a game of cat-and-mouse with the market.

As far as we can see, these kind of levels are likely to remain for a little while longer.

Getting more specific on the outlook, it looks as though the GBP/EUR market could be about to head back towards the bottom of its range.

The release of the minutes for the ECB's June meeting has sent the Euro higher over the course of the past 24 hours in a move that merely anchors the Sterling-Euro rate in this range:

So the call from here is relatively easy in our book - the exchange rate is more likely than not to fall back towards support around 1.13.

We see little evidence on the charts that markets have any desire to let Sterling get cheaper than this.

Looking to the top, we see little appetite for betting on a rally beyond 1.14 in the current environment of broad-based Euro strength.

So, the market opening on Monday will be important - can the 1.13 level attract the buying interest needed to save the UK currency from further declines?

At the Heart of the Matter is a Deadlock Between Central Banks

It's deadlock between the Euro and Pound at present with markets unable to push the GBP/EUR exchange rate out of the 1.13-1.14 band.

Part of the reason lies with the fact that both the European Central Bank and Bank of England are threatening higher interest rates in the not-to-distant future.

When central banks adopt this kind of tone their respective currencies tend to rise.

What happens when both sides of the equation adopt this kind of tone is stalemate, as we are seeing in GBP/EUR.

This presents us with an intriguing scenario - which central bank will blink first - the BoE or the ECB? This is an important question, because whoever rows back from their pro-hike rhetoric first will likely see their currency fall.

Whoever acts first will likely see theirs rise.

Nordea Bank AB - the Nordic financial services group - reckon that the Bank of England has more reason to go for an interest rate rise than their European counterparts and this makes the Pound a potential buy.

Analysts at Nordea’s Markets division have looked at the UK’s inflation level - and the Bank of England’s record-low interest rates - and reckon something has to give.

A situation in which the Bank keeps rates at 0.25% while inflation creeps towards 3% is untenable and those warnings from Mark Carney and other policy-makers that rates might rise in 2017 actually have some credibility.

Central banks seek to quell inflation by raising interest rates; the idea is that this cools spending. A byproduct of higher interest rates is a stronger currency.

Hence, all this sounds quite good for those hoping for a stronger Pound.