Pound Euro Hits BEST Exchange Rate Since 2012 - But Can GBP/EUR Expect More Gains?

The result is the pound to euro exchange rate has reached 1.2506; its best best exchange rate since November 2012.

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Why is the pound sterling higher against the euro?

The pound rallied hard after the BoE Governor Carney said that the first interest rate increase may happen earlier than market expectations in his speech at London’s Mansion House Dinner.

Ipek Ozkardeskaya at Swissquote Research says:

"The Chancellor Osborne highlighted that the house prices stand at historical high levels and may place the financial stability at risk in the future. GBP/USD surged to 1.6987 for the first time since May 6th (same day, the Cable has hit 1.6996 high), the bullish momentum gained pace. The critical resistance stand at 1.6996/1.7000 (May 6th high / psychological level), stops are eyed above.

"EUR/GBP took a dive to hit 0.79869 for the first time since November 2012. The oversold conditions suggests upside correction pre-weekend. The RSI stands at 21%, the 30-day lower BB at 0.80275. Option barriers are seen at 0.80300 and 0.80750 before the week close."

Employment data provides support

Even before the Carney intervention the pound was performing well  following a positive employment report, which saw employment rise by 345k in the three months to April – the strongest gain since records began in 1971. 

The unemployment rate fell 0.2 pps to 6.6%.  Despite these encouraging metrics, wage growth was undeniably weak, with headline wage growth slipping from 1.9% to 0.7% Y/Y, and ex-bonuses falling from 1.3% to 0.9% Y/Y (mkt 1.2% for both). 

"In all, one could argue that the very subdued pace of real wages will perhaps carry more weight for BoE policy than the progress being made in employment, as the former implies less inflationary pressures in the pipeline," says Shaun Osborne at TD Securities.

The ONS reported on Tuesday that Industrial Production (YoY) (Apr) expanded 3%, analysts had expected growth of 2.8%.

Manufacturing Production (YoY) (Apr) expanded 4.4%, well ahead of the 4.0% predicted.

Compare the UK's situation to that of some of the Eurozone's leading economies.

French Industrial Output (MoM) (Apr) came in below expectations at an anaemic 0.3% while Italy's economy continues to shrink.

Today's Italian Gross Domestic Product (QoQ) (Q1) read at 0.1%.

It is because of the sluggish Eurozone economy that the ECB has acted and cut interest rate while considering introducing some form of quantitative easing.

Meanwhile, the Bank of England is gearing up for an interest rate rise.

The end of Monday's session saw BoE policymaker, Ian McCaffertery, voice his opinion on the current state of economic recovery in the UK.

He hinted that the BoE was edging closer to tightening monetary policy but there had to be signs of growth picking up before the likelihood of any action.

He also made clear that economic data releases in Q3 and Q4 would very much be responsible for establishing a time frame in which we should expeect rates to be hiked.

That the sterling euro exchange rate is trending higher in this environment should come as no surprise.

"With growing confidence across most sectors in the UK, it appears as though the UK economy is better positioned than ever following the recession with the BoE now likely to put more emphasis on longer term sustainability," says Kamil Amin at Caxton FX.

Outlook dominated by UK employment figures

Be aware that Wednesday offers important employment data that could impact the currency.

Claimant Count Change (Apr) is predicted to read at -25.0K while the ILO Unemployment Rate (3M) (Apr) is forecast to drop to 6.7%.

Average Earnings including Bonus (3Mo/Yr) (Apr) are predicted to read at 1.2%.

Markets Today: Equities higher, volatility low

On the whole, trading volume and volatility are dragging along low levels as stocks reach new highs.

"Most major benchmarks, particularly in developed nations, are sitting at six year highs, though it remains to be seen how long they’ll be enjoying the view from up there. Later in the session, we have US wholesale inventories data which will be under the spotlight," says Daniel Sugarman at ETX Capital.

Equity markets in Europe fell at Tuesday’s open, pausing for breath after rising to their highest level in more than six years in the previous session.

The Stoxx Europe 600 Index rose to its highest level since January 2008 yesterday, as stronger than expected Japanese GDP data fuelled optimism about the global economic recovery.

"Although the Stoxx Europe 600 index trades weaker Tuesday, risk appetite remains on board with market participants taking stock for now ahead of key economic data out during the session – first off, we have UK manufacturing and industrial output data to watch out for," says Sugarman.