GBP/EUR's Uptrend Tested by Inflation, Resistance @ 1.42
The GBP to EUR conversion is hamstrung by a stubborn resistance level which is ensuring an advance on the best exchange rate levels of 2015 remains out of reach for the time being.
The GBP has retraced all of its post-BoE losses registered last week despite weaker-than-expected September wage growth.
The good news for those holding out for a higher pound to euro exchange rate is that the uptrend in the pair remains valid as we walk into the new week.
The GBP has recovered from the October lows at 1.34 and risen steadily. Indeed, last week we were watching the ascending support line for confirmation that further gains were ahead.
That call was correct, and we believe that further advance are likely.
The bad news for those looking for the best exchange rate levels of 2015 to be achieved once more is that there is notable resistance at the 1.42 line.
As the above graphic illustrates, the GBP has hit resistance at this level and failed to advance 3 times in November.
This suggests euro buying interest remains fierce at this level and I suspect there simply is not enough fundamental impetus for the GBP to break this point.
The one data point in the week ahead that could break this level is inflation - due out of both the Eurozone and UK.
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.
Eurozone inflation figures were released on Monday, markets were expecting a figure of 0.1% which is exactly what they got. It seems that ECB governing member Vitor Constancio has sparked a new round of EUR selling on comments that the ECB stands ready to enact further measures to boost Eurozone GDP growth and inflation.
This is just another indication that the ECB is gearing up for an interest rate cut in December.
Constancio has continued the recent trend of ECB members warning that December may see the Bank cut interest rates - a highly negative scenario for the euro at the moment.
For sustained GBP/EUR strength to occur we will also require some eye-openingly positive data from the UK to convince the Bank of England to bring forward their start date for raising interest rates.
On Tuesday the UK releases inflation data. We have noted that the Bank of England is increasingly focussed on inflation as the prime determinant to future interest rate rises.
A beat on the forecast figure of -0.1% expected. Again, a reading on either side will move the pound.
GBP Strength Unsustainable: Barclays
A word of warning for the GBP bulls. Barclays have warned that they think this GBP strength is unsustainable in the context of fiscal and monetary policy headwinds.
Barclays think this GBP strength is unsustainable in the context of fiscal and monetary policy headwinds.
Barclays join other major institutions in saying impending EU referendum risk is likely to weigh on the currency in coming months.
Inflation Data Confirms Prices Still Falling
November's release of October inflation data confirms the UK is stuck in deflationary territory for the second month in a row.
The November release saw a -0.1% y/y print.
This confirms price pressures remain subdued and there is very little reason for the Bank of England to raise interest rates.
Until markets start pricing in an interest rate rise at the Bank to take place over coming months we find it difficult to imagine the British pound achieving levels at 1.44 in 2015.
