- GBP/EUR nearing dense pocket of techical resistances
- Key moving-average & Fibonacci levels could stall rally
- UK data painting picture of calm but 2023 storm looms
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The Pound to Euro exchange rate has built further on last Friday's advance early in the new week but its hat-trick of gains now has Sterling fast approaching a dense pocket of technical resistances near and above the 1.16 level on the charts, meaning the rally could be likely to stall in the near future.
Sterling fell back below 1.15 against the Euro around the opening of November and had struggled to recover above it over subsequent weeks before a rally last Friday lifted GBP/EUR above the pivot-like threshold and left it with a clear road ahead toward 1.16 to open the new week.
The Pound was trading above 1.1550 on Tuesday and closing in on its 200-day moving average located up around 1.1609, although if and when above this particular technical impediment, the Sterling-Euro pair would then be confronted by a series of other technical obstacles.
These include 78.6% and 61.8% Fibonacci retracements of the late August and early April downtrends respectively, making for a dense pocket of technical resistances that could frustrate the Pound-Euro rebound without a significant pickup in momentum for Sterling.
"Sterling is a middle-of-the-pack performer among the majors this morning. Government borrowing in Oct was GBP12.7bn, well below the GBP19.1bn expected, and Sep data was revised lower from GBP19.2bn to GBP16.9bn—positive news at the margin," writes Shaun Osbourne, chief FX strategist at Scotiabank, in a Tuesday market commentary.
Tuesday's gains came amid a rally in global stock markets that was echoed by riskier currencies and after the Office for National Statistics reported a surprise fall in the level of public borrowing for October.
"The 1.0% YoY contraction in central government tax receipts is a little concerning, as it may be another sign of a slowing economy," says Stephen Gallo, European head of FX strategy at BMO Capital Markets.
"These are NSA data, and October doesn’t tend to see a seasonal fall in tax receipts. As such, the trend should be watched," Gallo adds.
Tuesday's data came in the wake of Friday's revelation of a larger-than-expected rebound in retail sales for the same October.
"The 0.6% month-to-month rise in sales volumes followed two substantial declines, leaving them still a hefty 6.1% lower than a year ago," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
"Retail sales might hold their ground over the rest of 2022, thanks to a jump in fiscal support to households," Tombs writes in a Tuesday research briefing.
Tombs says UK households will spend something like £66 per month less on energy this quarter than they did in the second and third quarters of the year owing to the Energy Bills Support scheme announced by HM Treasury during the period when Prime Minister Rishi Sunak was Chancellor.
This offsets much of the October 2022 increase in the average annual household energy tariff from £1,971 to £2,500, a new annual tariff that is discounted from £3,549 due to the Energy Price Guarantee Scheme announced by former Prime Minister Liz Truss.
"Early next year, however, households will see their incomes hit hard again, as government support starts to wind down. For starters, a typical household will see their annual energy bill rise to £3.0K in April, from £2.5K, while the £400 Energy Bills Support Scheme grant will roll off at the end of March," Tombs says.
The trouble for households, the economy and Sterling is that from April 2023 energy bills are set to rise significantly again when the average annual tariff will increase by a further 20% to £3,000 as a result of changes announced by Chancellor Jeremy Hunt in last Thursday's budget.
This will bite harder into household incomes due to the simultaneous expiration of the Energy Bills Support Scheme but will also exert an upward influence on UK inflation rates while having other implications for the public finances.
"Meanwhile, the latest labour market numbers suggested that demand for workers is softening, but not by enough to seriously eat into labour shortages. Job vacancies fell further in the three months to October," says Andrew Goodwin, chief UK economist at Oxford Economics.
"However, still very low rates of redundancies suggest weaker demand has so far translated into restraint on hiring rather than lay-offs. But the number of people not in work or actively looking for work continued to grow. And it was higher inactivity, not more people in employment, which pushed the LFS jobless rate down to 3.6% in Q3," Goodwin adds in a recent research briefing.