GBP/EUR Edges Higher: (GBP/EUR) Exchange Rate Conversions Find Support from On-Par GDP Data

The British pound (GBP) has witnessed its conversion rate against the euro ultimately edge higher in what proved to be a volatile week on currency markets. 

It was a soft start for the pound sterling which fell following the release of the minutes for the October policy decision meeting at the Bank of England.

The rate then staged a strong comeback through the course of the mid-week session and into Thursday as fresh woes niggled on the euro side of the GBP/EUR equation.

At the weekend the conversion rate is firm following the release of on-par UK GDP data on Friday. We see 1 GBP = 1.2692 EUR. 

The rate is capped by the 1.27 level, and as we see here the pound to euro may have to wait a while yet before attempting a crack higher.

Be aware that the above is a spot market quote, your bank will charge a discretionary spread charge, however an independent specialist will seek to undercut your bank's offer. This can deliver up to 5% more FX in some instances.

GDP Data On-Target, GBP/EUR Supported

UK GDP figures printed at 0.7% as expected and cable staged a mild relief rally as some traders feared that the recent slowdown in activity could translate into lower growth figures. The preliminary data showed that production rose by 0.5% versus 0.2% the period prior but services slowed to 0.7% from 1.1%.

The slowdown in activity reflects the tepid demand conditions in EZ as whole, but on that front there was some positive news as GFK Consumer data out of Germany showed an uptick rising to 8.5 from 8.1 expected. The latest data from Europe indicates that conditions have stabilized and may actually improve into the year end as the shock of geopolitical tensions with Russia begins to wane.

For now however there is nothing in the UK data to indicate that BOE is about to shift its policy stance and that means that pound euro rates will remain rangebound for the time being.

Renewed Selling Pressure on Sterling Prompted by Retail Sales Figures

On Thursday GBP came under selling pressure after it was shown UK retail figures came in below expectation.

• Retail Sales (YoY) (Sep) grew by 2.7%, analysts had predicted growth of 2.8%.
• Retail Sales (MoM) (Sep) fell by 0.3%, analysts had only expected a decline of 0.1%.

Consumer spending has helped drive the UK's economic recovery, but news on Thursday from retailers Debenhams and Tesco and estate agents Foxtons have underlined the slowdown.

Slow wage growth, falling house prices, and global economic worries have raised concerns about the UK recovery and this is now being felt in the currency markets as the sterling rally is capped.

Bank of England Minutes Prompt GBP Slump

The minutes showed the MPC voted 7-2 in favour of keeping rates unchanged again.

However, it was the wording in the minutes that have pushed the GBP lower. The Bank notes that there are signs UK economic growth is losing momentum and that a rate hike may leave UK vulnerable to shocks.

We are however not surprised by today's tone from the Bank - indeed the markets will have priced a lot of this into sterling conversion rates already.

Thus, we see the risks emerging for upside gains as the news of a late interest rate hike grow stale. A further firming on stock markets and improved sentiment in the Eurozone will likely keep GBP bid.

Why is the Euro Still Vulnerable Though?

The euro has fallen on news that several banks possibly failing ECB's stress tests as well as the better than expected US inflation numbers put pressure on the EUR on Wednesday.

Fixed income investment firm Pimco's global banking specialist, Philippe Bodereau, expects 18 banks will be seen to have failed the European Central Bank's stress test of 130 regional lenders when results are published by the ECB on Sunday.

Bodereau, who manages $4.3 billion in the Pimco GIS Capital Securities Fund, said in an interview on Wednesday the failures would likely include some German and Austrian cooperative and public sector banks, as well as weak regional lenders in the southern periphery.

This is just another case of euro-negativity that has drip-fed through to us this week; the outlook does ultimately favour sterling in the longer-term.

Recent news concerning the potential purchase of corporate bonds by the ECB, while unconfirmed, saw the euro come under fresh selling pressure in mid-week trade.

The news ensures the pound to euro exchange rate (GBP/EUR) continues its uptrend - the outlook remains bullish in the long-term.

The euro exchange rate complex traded lower following reports that suggested the ECB were considering buying corporate bonds.

According to Lloyds Bank Research:

"These rumours were later played down suggesting that it is only an option to the ECB but talks have not progressed. In practise, the buying of corporate bonds will go towards helping the ECB achieve its target to raise the balance sheet towards 2012 levels (approx. €2.5-€3trn). 

"It’s not exactly clear why the market has viewed this as EUR negative especially as 2y rate spreads held firm in favour of the EUR yesterday."

"Reports surfaced today that the ECB might redouble its latest efforts and further beef up its balance sheet and increase the flow of euros sloshing around the banking system," says Joe Manimbo at Western Union.

Outlook: Why Monday's Will Now be Important for the GBP to EUR Rate

The ECB will give markets their updated balance sheet numbers every Monday afternoon (starting next week), this will allow traders to gauge how successful they are going to be at getting close to their soft target for the balance sheet.

The ECB is broadly aiming to return its balance sheet to 2012 levels, so we could see around 400 BN EUR pumped into the markets. As supply increases so prices fall (hence the downward pressure on the EUR rate family).

"So every Monday's release will now be important in this regard but for now we had some early indications from the FT which suggested that the ECB purchases included Spanish, German and French issues."

"These purchases weren't enough to stabilise peripheral debt as Italian, Spanish and Portuguese 10Y yields rose +10bps, +9bps and +18bps respectively whilst German and US 10Y yields both fell slightly, by -1bp and -5bps respectively."

Euro Exchange Rate Weakness is Justified

Meanwhile, Treasury Secretary Jack Lew said in a brief on-the-record conversation Monday with CNBC he is watchful for exchange rate movements against the dollar that are the result of obvious interventions and policies by governments aimed at depreciating their currencies against the greenback.

In contrast, he said exchange rate movements that are linked to differences in economic outlooks concern him less. He said recent movements of the euro versus the dollar seem linked more to differences in growth than they do policies aimed at depreciating the euro.

Lew, in recent comments to the IMF, urged countries not to use policy to force their currencies to appreciate, suggesting he had some concern with recent exchange movements.

Beware, Risks Ahead for the Pound Sterling

Turning to the UK element of the GBP/EUR equation it is worth remembering we are heading into a potentially volatile few sessions.

First up is the Bank of England's release of the October MPC minutes.

There is a risk that all members voted against raising interest rates - such a move could signal to markets that the first UK interest rate has been pushed back towards mid 2015.

This will keep the GBP under pressure.

However, we do reckon that the market has absorbed much of the risk associated with such an outcome; we therefore see any dips in the pound to euro exchange rate as being shallow.

That said, there are also retail sales and GDP figures due towards the end of the week which could also throw up some negative surprises owing to the recent negative sentiment we have seen on global markets.

The outlook remains positive for sterling euro, but beware the bumps.