Pound / Euro Exchange Rate at Risk of Further Weakness

The British pound to euro exchange rate is at risk of further declines over coming days and weeks as trend momentum breaks down.

The UK currency continues to give back the gains it made mid-week following decent UK industrial production numbers.

For the GBP to EUR conversion it is worth noting that the 1.36 level appears to have been too tough a nut to crack. The 1.36 is a significant support and resistance zone.

We warned last week that the GBP/EUR would struggle to breach this important area of resistance, which has proven true.

The pair is trading at 1.355 at the time of writing and looks intent on testing the recent lows at 1.3450.

We see support lying back at the October lows at around 1.3450 and would suggest a substantial break-down in confidence towards sterling will be required to break below here.

Our bias is for the upside to resume and a target of the upper end of the September range at 1.28 seems appropriate.

Bank of England Sparks Further Weakness Against the Euro

The pound sterling softened following the release of the Bank of England's policy decision on interest rates.

The BoE opted to keep interest rates steady while 1 of the 9 members of the committee voted to raise rates confirming no surprises.

One area of interest was the Bank's observation that sterling remains strong:

"Core inflation remains subdued at around 1%, influenced both by restrained labour cost growth and by muted import cost growth, itself partly reflecting the continuing dampening influence of sterling’s appreciation since mid-2013."

McCafferty voted to raise interest rates again citing the potential for sharply higher inflation ahead:

"Ian McCafferty preferred to increase Bank Rate by 25 basis points, given his view that building domestic cost pressures were likely to come to outweigh the dampening influence of the appreciation of sterling, causing inflation to overshoot the 2% target in the medium term."

Latest Pound/Euro Exchange Rates

	Live: 1.1456▲ + 0.11% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1066 - 1.1112
**Independent Specialist	1.1296 - 1.1341 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Will the bank attempt to actively pursue a lower exchange rate in the future?

We have reported that more institutional analysts are now forecasting the first interest rate rise to now occur in May 2016, the further back this start date is pushed the weaker the GBP will likely become.

The overall dovish slant to this edition of the MPC’s minutes adds to sterling’s recent headwinds as the UK’s growth momentum slowed over the last several weeks.

“While we remain comfortable with May 2016 as our most likely candidate for lift-off for rate hikes by the BoE, the risks now seem skewed to a later hike,” says James Rossiter, analyst at TD Securities in London.

This backdrop suggests that the latent overhang of long-GBP positions is likely to come under additional pressure – at least in the near term.

TD Securities think the upward correction in EURGBP may take another leg higher as a result.

“We think a move to the 0.7500/50 area is not unreasonable in the foreseeable future, while we note longer term resistance comes in at around 0.7590 and 0.7655,” says Rossiter.

Turning the equation around this suggests the pound to euro could fall to 1.33/1.3245. Thus longer-term support is at 1.3175 and 1.3060.

The Pound: What to Watch in the Week Ahead

For sterling there are three data points that could determine whether the GBPEUR remains in a protracted downtrend or whether a recovery is sparked:

1. September Inflation (13 Oct): UK inflation is likely to dip back down into negative territory. (GBP-negative).

2. September Employment Data (14 Oct): Wage growth is expected to remain strong, with ex-bonus earnings lifting up to around 3% y/y. (GBP-positive).

3. Minouche Shafik Speech (10 Oct): We might gain some insights into how she’s viewing inflation and interest rate prospects in the UK.