Pound / Euro Rate Fails @1.18 as Market Takes Cue from EUR/USD Rebound
- Pound to Euro exchange rate (25-11-16): 1.1753, 24-hour best rate: 1.1813
- Euro to Pound Sterling exchange rate: 0.8511, 24-hour best rate: 0.8594
The British Pound to Euro exchange rate is retracing some of this week's gains ahead of the weekend as the heavily oversold EUR/USD rate rebounds.
GBP traded to its best exchange rate against the EUR since mid-September with 1.18 on the mid-markets being achieved in the hours following the Autumn Statement.
However, the initial tests of 1.18 have been brief affairs with the pair slipping below here soon after confirming there appears to be a strong offer on Sterling in this level.
With little having been on the menu for Sterling since the Autumn Statement the market is left taking cues from other corners.
As we have seen so many times already in 2016 direction in EUR/GBP is often taken from moves in the heavier EUR/USD.
And ahead of the weekend we are seeing a robust bounce in EUR/USD which is also aiding the Euro against Sterling.
EUR/USD was looking grossly oversold this week and was due a bounce to correct oversold conditions, and markets could be obliging.
If this trend continues expect the Pound to struggle agianst the Euro.
But, Technicals Confirm Further Gains Still Possible
The Pound's November rally has been quite impressive with GBP/EUR recovering from lows at 1.1050.
The pair has since broken above the 100 day moving average in a sign that momentum is shifting towards Sterling across all the major timeframes and advocating for an extension of the move higher.
Karen Jones at Commerzbank today tells clients the pair may still reach the 50% Fibonacci retracement of the move down that started in May at 1.1972, above which lies the 1.1994 September high.
Jones is looking for some kind of stabilisation to set in over the short-term and any Sterling weakness is expected to be weak.
As Sterling heads above 1.18 on the mid market, we see international payment rates on bank accounts edge towards the 1.1390-1.1480 region while independent specialists are quoting in the 1.16-1.1680 zone.
"Overall Sterling is now at a 2 month peak against a basket of currencies, suggesting investors weren’t particularly bothered by the flaccid future growth, expanding deficit and rising national debt outlined by Philip Hammond and the OBR during yesterday’s Autumn Statement," says Connor Campbell at Spreadex.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1004 - 1.1049 |
**Independent Specialist | 1.1232 - 1.1277 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The Right Kind of Borrowing Deterioration
Sterling was the second best-performing currency in the G10 after the US Dollar over the course of the past 24 hours despite the horrid GDP downgrades and borrowing upgrades in the Autumn Statement.
But, a deterioration in the UK's borrowing outlook can be either good or bad for Pound Sterling, depending on the source of that deterioration argues RBC Capital Markets’ Adam Cole.
Currency strategists at RBC believe that what was important for GBP at today's Autumn Statement was why future borrowing and debt levels are going to be higher than forecast back in March.
“A deterioration in the borrowing outlook led by a large discretionary easing of fiscal policy would be GBP-positive, as it would support the markets’ tentative move toward pricing in higher policy rates next year,” says Cole.
But, a large increase in borrowing which is driven by cyclical factors (weaker growth) would be GBP-negative argue RBC Capital.
And for Sterling, it appears that the deterioration in the borrowing outlook erred on the side of the positive as the new Chancellor pledged to increase spending on the UK's infrastructure and research and development programmes.
The Autumn Statement prioritised additional spending on high-value investments, specifically in infrastructure and innovation.
“We can fund this commitment in the short-term through additional borrowing,” says Hammond.
UK productivity growth has been weak since economic downturn with workers in the G7 being a great deal more productive than their UK counterparts.
“Raising productivity is essential for the high-wage, high skill economy that will deliver higher living standards for working people,” Hammond told UK lawmakers.
GBP/EUR
Daily Chart Showing live Inter-Bank Rate and Indicative Rates for International Payments.
The formation of a new National Productivity Investment Fund was announced and will be funded to the tune of £23 billion.
A £2bn boost for R&D was also announced.
All this helped push up the UK's borrowing requirements over coming years which now look as follows:
- 2016/17: £68.2bn
- 2017/18: £59bn
- 2018/19: £46.5bn
- 2019/20: £21.9bn
- 2020/21: £20.7bn
- 2021/22: £17.2bn
The OBR forecasts debt will peak at 90.2% of GDP in 2017-18 and fall to 89.7% of national income in 2018-19.
A large part of that rise is however also cyclical owing to a forecast slowdown in growth owing to Brexit.
But because a good portion of today's forecast chances are non-cyclical the markets believe they have seen the right kind of borrowing from Pound Sterling's perspective.
No Game-Changer for the Pound
The Pound moved higher against the Euro and other G10 majors as a result of the statement but against the Dollar we saw losses.
Granted, GBP/USD's decline is more a function of broad-based Dollar strength owing to some good economic statistics coming out of the United States today.
That said, analyst Viraj Patel at ING reckons any strength will ultimately prove fleeting.
"The Autumn Statement consisted of a series of small steps in the right direction, though we do not see these as having any game-changing implications for our bearish GBP outlook."
ING believe the UK’s large twin deficits (fiscal and current account) should not be underestimated as they will continue to exert downward pressure on GBP over the medium-term.
"Should the dollar remain strong, risks are that GBP/USD troughs out at 1.15 in 1H17," says Patel.
