Pound Euro FAILS at Resistance Point Again However the Best Exchange Rate of 2014 Still in Reach

This week saw the British pound (GBP) promising to offer fresh highs to those currency market watchers looking for a better exchange rate against the euro.

However, a couple of important mid-week obstacles stood in the way of a jump higher towards the year's best levels. The timing of these events coincided with the GBP/EUR's climb towards a significant resistance point that has already in 2014 stalled sterling's advance.

The GBP surged following news that UK pay packets had grown faster than expected, however an hour later this strength unravelled as the Bank of England showed it was nowhere near its first interest rate hike, a revelation that prompted a bout of heavy selling pressure.

At the time of writing the pound to euro exchange rate (GBP/EUR) is a further 0.30 pct lower on a day-to-day comparison, the conversion is seen at 1.2649. The euro to pound is at 0.7907.

As we can see from the below, the resistance point just above 1.28 appears to be very well entrenched and will require some really good news for the GBP to break. That said, the trend does still remains positive despite the current selling pressures:

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Attempt at Best Pound to Euro Exchange Rate of 2014 Foiled by the Bank of England

The GBP is in the spotlight this week with the Bank of England’s Quarterly Inflation Report (QIR) and employment data both being released on Wednesday.

The BoE’s forecasts showed a weaker near-term inflation profile and a marginally stronger labour market outlook with growth expectations largely unchanged in positive territory. It was on the talk of inflation that the pound euro rate took a dip.

Samuel Tombs, senior UK economist, Capital Economics says, "November's Bank of England inflation report provides further reassurance that the MPC will keep interest rates on hold for a number of months yet.

"The MPC continues to believe that strong growth will not generate inflationary pressure due to the spare capacity in the economy, which it thinks remains in the region of 1% of GDP."

It appears markets have little interest to buy the GBP in the curent environment.

That said, the outlook for the UK economy remains superior to that of the Eurozone and buyers will ultimately step into the market to take advantage of the decline in GBP/EUR.

Indeed, there are those who are still ahead of consensus with the timing of the firest rate hike.

"We currently expect the first BoE rate hike in Q1 2015, but a lack of wage pressure, the proximity of the general election, as well as subsequent fiscal consolidation pose risks to our early rate hike call," say Barclays in a foreign exchange note to clients.

Barclays say they prefer buying GBP on dips, especially against EUR as they expect the ECB to announce sovereign QE as early as Q1 2015 (ECB unanimously endorses balance sheet target, 6 November 2015).

"We think the market is pricing in too much dovishness from the BoE and remain constructive on the GBP, especially against EUR as we expect the ECB to announce sovereign QE by Q1 2015. As for employment report, we are in line with consensus expectations for an unemployment rate of 5.9% in September and a more-timely claimant count change of -20.0k for October," say Barclays.

The Euro Undermined as the ECB Trundles Towards Full Quantitative Easing

While the big issue for the pound sterling is the timing of monetary tightening, the exact opposite can be said for the European Central Bank (ECB) which continues to loosen its belt and look for ways to put more currency in the economy.

Two weeks ago, there was the BoJ increasing and extending QQE, look how sharply the Japanese Yen fell, indicating just how negative these events can be for a currency.

Last week, it was the turn of ECB Pres Draghi, with a clear roadmap to QE, agreed unanimously by the governing council, if the current easing programme proves
to be insufficient - something many commentators and analysts reckon to be the case.

Jonathan Webb at Jefferies says the euro should ultimately continue to weaken:

"Most important was a firm commitment to take additional measures to achieve the €1 trillion balance sheet increase, if the current measures do not achieve that goal and a commitment to take further action if inflation expectations fall further.

"Furthermore, committees in the ECB and Commission will be established to investigate further unconventional measures.

"This advance work makes a lot of sense given the German Constitutional Court is still pontificating on the legality of OMT.

"The slow trundle by the ECB to full QE continues though it could be the end of Q2 before the ECB is finally ready to pull the trigger. Nevertheless, this can only be negative for the EUR and we suspect that QE speculation next year will push EURUSD below 1.20 before that time."