Pound slumps lower as GBP continues to enjoy positive momentum; speed bumps ahead though

On recent momentum along we note the outlook is tipped to favour the GBP; over at Barclays analyst Chris Walker says one of his favourite trades this week is a Sell on EUR/GBP:

"Short EUR/GBP. Despite a more pro-active monetary policy framework, the improvements in the cyclical outlook in the UK also suggest to us GBP should now trade between the USD and EUR since the recovery, while uncertain remains ahead of that in the euro area."

Jyske Bank analyst Leander Dreyer is also advocating a Sell on EUR/GBP, he says:

"The forward guidance of the BoE confirms to us that there will be no further easing on the part of the BoE and that the economy is improving. This supports GBP against EUR, DKK and CHF.

"We interpreted this as an implicit message that the UK economy is more resistant to the recent increases in interest rates than is the case for the economy of the eurozone. We expect that the higher interest rates will last, and that is one reason why we expect that GBP will outperform EUR in H2 2013."

UK data will be key to Sterling direction this week

It is a busy week ahead for the British pound with some key economic releases that could torpedo the British pound's recent good run. We suspect any small disapointment would be all that is required to trigger a bout of profit-taking, so watch the numbers.

UK labour market data (Wed) will take centre stage this week, given the BoE’s new guidance framework.

"We expect GBP to become increasingly sensitive to surprises in labour market data, though this will only likely occur once we approach the bank’s 7% threshold. Our economists expect the unemployment rate to remain sticky but gradually fall, in line with the BoE’s forecasts," says Walker.

For this week Barclays say they expect a move lower in the unemployment rate to 7.7% (cf 7.8%) and jobless claims of -15.0k (cf-15.0k), which may lead to some near-term GBP upside. We expect CPI (Tues) unchanged at 2.8% (cf 2.8%) and core retail sales (Thurs) of 0.2% (cf. 0.8%).

The BoE minutes (Wed) will also be closely watched, though we expect no change in the vote split (9-0) and much of the information will likely have been presented in the QIR already.

There is also important data ahead for the Euro. Kathy Lien at BK Asset Management says:

"For the Eurozone, the German ZEW survey on Tuesday and second quarter GDP numbers on Wednesday are key. There has been a general trend of improvements in the German manufacturing sector that should lift investor confidence but the sharp decline in retail sales in Q2 may have dampened growth in the quarter.  

"If German GDP fails to live up to market expectations, the EUR/USD could slide to the bottom of the range indicated."