Pound Sterling: GBP to Euro Exchange Rate Shoots Higher, Gains Seen vs US Dollar

On Friday, interest in sterling remains positive:

• The pound to euro exchange rate is at 1.2505.
• The pound to dollar exchange rate is 0.29 pct higher on a daily basis having reached 1.6977.
• The pound to Australian dollar exchange rate is 0.43 pct higher at 1.8038.
• The pound to Canadian dollar rate is 0.21 pct higher at 1.8423.
• The pound to NZ dollar is 0.55 pct higher at 1.9588.

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Why is the GBP so hot right now, and is it getting overbought?

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 warns that profit-taking could however now take place:

"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."

Wages still not keeping up with inflation - But GBP Powers Ahead Regardless

Following the news that UK unemployment is falling faster than even the most optimistic would have predicted, John Salt, Website Director of totaljobs.com, says:

“Today’s announcement shows that businesses are feeling more confident than ever about taking on new staff. The government now needs to follow through on promises made in the Queen’s Speech to introduce measures that will help people find stable employment rather than temporary ‘quick fix’ roles."

The claimant count fell by 27.4K - well ahead of the expected 25K people taking the amount of people on benefits down to 3.2 pct.

BUT - there are concerns - and this will keep any GBP exchange rate gains ultimately capped. The worry concerns the failure of pay to rise.

The ONS reports that Average Earnings including Bonus (3Mo/Yr) (Apr) rose by 0.7%, well short of the predicted 1.2%. Therefore, the UK's population is ultimately still worse off as wage growth remains below inflation.

The Bank of England may see this productivity problem as a reason to hold back not interest rate rises.

According to Kathy Lien this will not impact negatively on sterling:

"This will not matter to EUR/GBP because even if wage growth is slow, the gap between U.K. and Eurozone monetary policies is widening and there is no support in the currency pair until 80 cents.  As for GBP/USD, the currency pair remains confined in a tight range that we do not expect to be broken by the U.S. retail sales report."

The outlook for the British pound

The GBP/USD exchange rate will likely remain vulnerable to the declines in EUR/USD as we move forward.

"For GBP/USD, the 1.6700 area remains good support. BoE’s Ben Broadbent’s testimony before the TSC will be closely watched for any indication that he views policy is 'more balanced' than before, similar to comments recently from McCafferty and Weale," says a note from Lloyds Bank Research.

The euro dollar exchange rate remains under pressure despite some decent industrial production data from Italy and France. EUR/USD has been trading in line with the widening of 2y EZ-US rate spreads.

"While the relationship between rate spreads and EUR/USD is perhaps not as tight as previously seen, the continued widening in rate spreads suggests EUR/USD bias may remain to the downside. The 1.3480/1.3500 will likely remain good support," say Lloyds.

Keep an eye out on the pound to New Zealand dollar exchange rate

GBP/NZD is a key focus at present with the market expecting the RBNZ to announce another rate hike to 3.25% this evening.

While this outcome may be viewed as NZD positive, the accompanying statement and the updated Monetary Policy Statement will be important.

"There are downside risks to NZD should the Bank indicates a pausing in the hiking cycle, or if it lowers the rate path projection. Governor Wheeler is also due to speak after the rate announcement. He recently showed some concern over the strength for the NZD and suggested that the Bank could intervene," say Llods.  

NZD TWI has pared back from the highs seen in May. However, the Governor may reiterate his discomfort towards the strength of the currency, which could further undermine NZD.