GBP/EUR Back Below 1.44 as EUR Recovery Shapes Up

The British pound to euro exchange rate (GBPEUR) cracked 1.44 over the course of the last week - but trade on Monday morning confirms our supicions that the move higher has over-reached.

The pound traded at fresh highs against a host of currencies with gains against the euro bringing the best rates since 2007.

The spot market in GBP-EUR was quoted at 1.4403 ahead of the Asian open. At the time of writing sterling euro is at 1.4360 with our last high-street bank indicator suggesting rates around 1.3958 are being offered for international payments.

Independents are closer to the market offering around 1.4188.

What of the outlook? We consider the three big fundamental drivers for the GBP which could deliver further gains, or bring losses, over coming days:

UK Retail Sales (Thu 23 July):

TD Securities have taken a look at the numbers and concluded that the data will likely disappoint.

Analyst Ned Rumpeltin says he is looking for a 0.2% m/m gain, half the consensus expectation.

“Discounting helped drive an upside surprise in May but CPI was roughly in line for June, so even with the better weather likely supporting positive sales growth, we should still see a slight disappointment,” says Rumpeltin.

Any disappointment, as forecast by TD Securities, will likely hurt the British pound.

Bank of England’s Minutes for the July MPC Meeting (Wed 22 July):

With key members of the MPC—Governor Carney now included— taking a more hawkish stance, the minutes from the 9 July policy meeting will be particularly important to the currency market.

“We think the vote to keep policy unchanged will be unanimous. The meeting took place under the dark clouds of Greek uncertainties and cratering equity valuations in China,” says Rumpltlin.

That said, TD Securities do think hawkish dissents are on the horizon and we expect the minutes to reflect a broadening support for tighter policy going forward.  

This is the final month the minutes will be released with a two-week delay. From 6 August, we will see the simultaneous release of the policy announcement, minutes, and Quarterly Inflation Report.

"BofE Gov Carney has also made optimistic comments of rates starting their slow normalisation process around the turn of the year. This brings anything from November to February into focus, and has given the GBP another wave of buying support," note Lloyds Bank at the start of the new week.

Public Finances (Tue 21 July):

The UK government’s recent ‘summer budget’ may put more focus on the monthly fiscal numbers than usual.

TD’s analysts see some downside to the consensus estimate of GBP 8.7 bn and think Public Sector Net Borrowing (PSNB) will fall to GBP 8.4 bn for June.

“While weaker than expected in June, the UK economy had enjoyed several consecutive months of solid employment gains and  wage growth. This should translate into improved tax receipts while government spending has been relatively flat in recent months,” says Rumpeltin.

The GBP remains positively aligned against a host of global currencies with momentum indicators suggesting further advances will likely be delivered.

GBP-EUR is particularly interesting having broken through resistance at 1.42 and we look for this level to now form support to further price action.

Technical Forecast: EUR Recovery

It is hard to say anything other than GBP-EUR is prone to upside momentum with a suite of indicators advocating for further gains.

However, we are inclined to focus on the over-extended nature of the move.

7 consecutive gains has seen GBP move from 1.3845 to 1.44 ensuring the Relative Strength Index (RSI) is in over-bought territory. The RSI reads at 67 - anything at 70 confirms overbought conditions and usually preceeds a pullback.

So there is technically further space to advance, but we would suggest gains are more constrained particularly as markets will now move away from focussing on Greece to focussing on improving Eurozone economic data releases.

Beware the euro comeback.

Indeed, on Monday we are seeing the shared currency advance against a number of competitors as corporates pick up discounted euros and speculators bet against over-extended moves.

This week offers little by way of substantial data releases and we expect technical and speculative decisions to dominate direction.