Pound Sterling to Euro and US Dollar Exchange Rate: All Drivers are External Ahead of New Month of Data

The pound sterling (GBP) to euro and US dollar exchange rate pairings have seen a vibrant 24 hours of trade in global FX. The ability to rally on dips confirms the outlook remains firm for the broader GBP complex.

Underlying the positive outlook for the GBP exchange rate family is the out-performance of the UK economy relative to its peers.

However, those looking for even stronger levels will be wary that further climbs have failed to occur owing to formidable resistance levels seen across many of the pairs. 1.22 in GBP to EUR and 1.86 in GBP to CAD are but two examples. The GBP / EUR was this morning knocked lower again after Eurozone inflation didn't fall as far as many had feared suggesting rangebound trading will remain in place.

On Wednesday we see the following:

• Sterling to Euro exchange rate:1.1966
• Sterling to US dollar: 1.2569
• Sterling to Australian dollar: 1.9434
• Sterling to Canadian dollar rate: 1.7695
• Sterling to New Zealand dollar rate: 2.1562
• Sterling to South African Rand rate: 22.8654

Note. The above quotes are indicative and your bank will create a wide spread on the rate when delivering you foreign exchange. However, an independent FX provider will guarantee to deliver you a tighter spread, thereby delivering more currency. Find out more.

US GDP data disappoints

With little on the domestic UK agenda all eyes are on the US where GDP figures came in below expectations.

"The bulls are facing a test of confidence this afternoon, as US Q1 GDP came in well below expectations. Output across the world’s largest economy by transactions printed a mere 0.1 percent expansion against forecasts of 1.2 percent. ADP by contrast beat consensus, showing 220k jobs added against a forecast of 203k. The market has so not reacted particularly badly, pointing to the main event later tonight: the Fed minutes," says David White at Spreadex.

UK GDP data misses the mark, Eurozone Deflation in Focus

Initial sterling exchange rate weakness was noted as GDP data missed expectations.

Gross Domestic Product (YoY) (Q1): 3.1% vs 3.2% expected.

Gross Domestic Product (QoQ) (Q1): 0.8% vs 0.9 expected.

"The pound has risen to fresh highs against the dollar in recent days but the slightly weaker than expected GDP figures have seen it fall back and it could drop below the 1.68 mark. Although this is a very minor blow for the Chancellor and the Bank of England, the outlook is still positive and the British economy remains buoyant," says Dennis de Jong at UFXMarkets.

As an indicator of just how firm sentiment towards the GBP is at present these low levels were not maintained. A number of key sterling pairs have managed to stage a recovery rally.

The euro was meanwhile sent lower on the back of inflation data from Germany that was weaker than predicted. The threat of Eurozone deflation has become all the more real, something the ECB will be taking note of.

Will the pound improve in value from here?

Kathy Lien wrote a great reflective piece on the inability of the UK currency to rally further.

She says there are just not enough buyers left out there, and to tempt more into the pro-GBP camp we will need OUTSTANDING economic data.

Lien writes:   

"In order for sterling to propel higher, the U.K. needs to report not just good but great economic data that could potentially force the Bank of England to rethink their steady monetary policy.  

"Overstretched positioning is problem for sterling but at the end of the day the central bank's relaxed attitude and the strong likelihood of major stops above current levels are all valid reasons why there's been no momentum behind the breakouts.  

"At the same time, there's always a risk of weaker economic data and that has kept GBP/USD below 1.6900.  

"Until investors are confident that there will only be upside surprises in U.K. data, GBP/USD may struggle with each attempted breakout."

UK GDP data ahead: What are the likely impacts on the pound?

Today's agenda is dominated by the release of GDP figures from the ONS at 09:30.

Gross Domestic Product (YoY) (Q1) is forecasted to read at +3.2%, this compares to the previous quarter's 2.7%.

Gross Domestic Product (QoQ) (Q1) is forecast to have grown at 0.9%, ahead of the previous 0.7%.

Lloyds Bank Research give their views on the possible impacts to sterling today's numbers could deliver:

"Initial market reaction to such a number might well be muted, but this is such a strong quarterly out-turn that even if it comes in as expected it should be seen as supportive for GBP.

"Similarly, and weaker than expected number can’t really be seen as negative, while a 1.0% print might be enough to propel GBP/USD to new highs near 1.69."

Keep in mind that GBP may also be gaining support from the continued M&A talk.

"Even though there is nothing firm on the Pfizer/AstraZeneca deal, the sentiment effects are also helping to underpin GBP. Scope for EUR/GBP weakness is more difficult to assess, as this is likely to be more dependent on the EUR and the Eurozone CPI data, but we would see risks as biased to the downside," say Lloyds.