GBP/EUR Struggles Below 1.2700; All Eyes on November Data Series

Currency market watchers hoping for a higher pound to euro exchange rate (GBP/EUR) were this week denied by the level of resistance located at 1.2700.

The technical level around 1.2700 has grown in importance as the illustration below shows us. Of course, technical numbers can't be the only explanation as to why GBP has failed to break higher.

So what is niggling at the pound? As our analysis notes, the British pound was hit by a poor set of UK retail numbers which have added to an overall sense that the UK economy may be easing off the accelerator.

We ask what will it take to drive the GBP over the 1.27 level? (We have just published the latest GBP/EUR 2015 forecast from Danske Bank which makes for interesting reading here).

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Why the Pound Sterling has Failed to Advance Against the Euro

The pound to euro exchange rate (GBP/EUR) went lower on a combination of factors; essentially news for the euro was good while news for the pound was negative.

"Euro and pound went their separate ways in early European trade today as better PMI data sent EUR/USD higher while cable tumbled on weaker Retail Sales. In the EZ the flash PMI readings sent a mildly positive message to the market suggesting that economic activity in EZ was stabilizing and no longer contracting," notes Boris Schlossberg at BK Asset Management.

However, it is not all good news for the euro - if we dig a little deeper we note that France continues to be a problem.

European PMIs saw mildly disappointing French Services (48.1 vs expected 48.3, prior: 48.4) were luckily offset by much better German Manufacturing (51.8 vs expected 49.5, prior: 49.9).

"Details of the French PMIs were even more disappointing than the headline, with both new business and employment contracting at their fastest rate in over a year," notes Shaun Osborne at TD Securities.

The Pound Sterling: The Almighty UK Consumer Closes the Wallet

The UK economy is a services economy - ie. there is a huge reliance on the retail sector and other non-manufacturing activities such as banking and insurance.

News that the UK consumer has cut back on spending somewhat saw markets sell the British pound.

Retail Sales declining by -0.3% versus -0.1% expected.

This was the weakest Retail Sales number since January with big fall coming from footwear and clothing.

"The UK news clearly signals a slowdown in consumer demand despite the fact that labour conditions in the region remain strong. Given the already dovish rhetoric from the BoE this report only confirms the fact that UK monetary authorities are likely to remain stationary for the foreseeable future," says Boris Schlossberg at BK Asset Management.

What Will Push the Pound to Euro Exchange Rate Higher?

Those who have sterling to sell and euro's to buy could get relief on the release of the third quarter GDP data due out on Friday the 24th.

Analysts are expecting a reading of 3%; anything more will tell markets they may be overly pessimistic on the UK economy and they should therefore readjust for stronger growth.

Buying sterling will be an expression of this and we could see the GBP/EUR run back towards 1.27.

That said, I suspect the catalyst for a break of this stubborn region will only come in November.

The start of each month brings with it the release of the three PMI releases - construction, manufacturing and services.

Markets are rather pessimistic on the UK's ability to generate expectation-beating data.

The risks are thus growing that the UK economy could start out-performing expectations.

When this happens the pound sterling may just get the jolt required to stage a rally above 1.27 and an attempt at the best exchange rates of 2014.

UK GDP Data Fails to Boost Pound to Euro Exchange Rate

On the economic front the 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.