Pound / Euro Rate Fails at 1.43 as Retail Sales Fall, ECB Minutes Ahead

The pound to euro exchange rate has seen its November rally run out of steam at the 1.43 marker which now becomes a barrier to achieving the best exchange rates of 2015 once more.

"Real money clients on the other hand, appear to be close to neutral, so there could still be more follow through selling of EUR ahead of the ECB meeting in December" - CitiFX.

Ahead of the release of retail sales figures we witnessed the best levels in the GBP to EUR conversion since August but a below-consensus figure (see below) has seen the British pound retreat. 

Nevertheless, momentum indicators remain in positive territory and advocate for further gains but there are two fundamental hurdles to leap on Thursday - in the UK we have retail sales numbers due and in the Eurozone the ECB release the minutes to their November meeting.

The exchange rate trades at 1.4258 and resides above the 20, 50 and 100 day moving averages on the daily charts and until a break below the 20 day MA occurs (at 1.4080) we fancy the uptrends chances at extending.

“From an underlying perspective the technical environment here looks much improved with a trend-like wave structure unfolding from the prior notable corrective low at 1.3350 in October," says Lucy Lillicrap, a risk manager with currency brokers AFEX.

We note that the GBP remains in uptrend mode and November could well deliver further gains, particularly if we note the recent comments made by Bank of England MPC member Ben Broadbent.

Broadbent suggests markets may have to re-price their expectations on interest rates and the exchange rate to reflect the strength of the British economy.

Nonetheless, we must also consider that the GBP may have over-extended itself for the time being. Lillicrap believes this initial recovery cycle has probably completed already around 1.4200, leaving GBP prices vulnerable on the downside again.

Latest Pound/Euro Exchange Rates

	Live: 1.1452▲ + 0.08% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1063 - 1.1108
**Independent Specialist	1.1292 - 1.1337 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Don’t be Surprised by Near-Term Euro Strength

But, the GBPEUR is looking overbought on the daily charts with the RSI trending around 70. While we have been expecting consolidation for some time based on this we have struggled to call the timing of any GBP weakness.

This week Pound Sterling Live has touched on how to approach the euro / dollar exchange rate having noted the EURUSD downtrend now looks oversold. When the word oversold is used we are inviting the prospect of a rebound.

The observation made on the structure of EURUSD applies to the EURGBP too – the RSI is in oversold territory and advocating for consolidation or a rebound.

"The silver liming for EUR from a short-term positioning perspective is that hedge funds appear to be stretched in long USD/ short EUR trades," says CitiFX noting that the market is running out of capacity to sell the euro much further.

CitiFX do note though that the ‘live’ ECB meeting in December sees hedge funds standing aside for now.

“Real money clients on the other hand, appear to be close to neutral, so there could still be more follow through selling of EUR ahead of the ECB meeting in December,” say Citi.

GBP Outlook: Retail Sales Disappoint

U.K. retail sales have disappointed expectations by coming in at -0.6%, deeper than the -0.5% expected. The decline was expected based on a fall in retail spending reported by the British Retail Consortium earlier in the month.

"Having received a boost from Broadbent’s rhetoric, volatility, at least on an intra-day basis, may be enhanced by a non-consensus Retail Sales release," say Lloyds Bank in a currency brief to clients.

Headline UK sales volumes surged by 1.9% m/m in September, vastly exceeding expectations and sending the annual growth to a heady rate of 6.5%. Although the surge was partly attributed to firm spending related to the Rugby World Cup, other categories also performed strongly.

"Already available retail indicators for October suggest that annual growth is likely to have eased back meaningfully. However, with the economic backdrop still supportive - given the resumption of employment growth alongside recent wage gains, we look for flat headline sales in October," say Lloyds.

Euro Outlook: ECB Minutes

Focus this week is on the ECB Minutes released Thursday ahead of the key meeting in December where Citi’s economists forecast a minimum cut of 10bps and an additional €15bn in QE as well as extending the QE program into 2017.

CitiFX say there are 4 key points to look for in the October Minutes this week:

• Clarification of Draghi’s “further lowering of the deposit rate was discussed”
• ECB’s balance between rate cuts, QE expansion and QE extension.
• Discussion on lower bound on rates (dovish) and/or concerns over bank profitability (hawkish).
• QE expansion – whether sovereign, corporate/ municipal purchases: former EUR –ve, latter less so.

Citi’s strategists say the EUR remains a ‘firm Sell on rallies’ ahead of the ECB’s December meeting.

This all confirms to us that the December meeting of the ECB looms large as the most important element for the pound to euro exchange rate’s outlook.

A shallow trajectory will likely characterise any further GBP/EUR gains as the date nears (the 3rd of the 12th) and we are not expecting any major moves.

Indeed, volatility ahead of the event could decline notably as traders pull their money for the market in an effort to cut their exposure to risk.

The biggest risk we feel is to the downside as markets are steadily pricing in a rate cut by pushing the GBP/EUR higher.

Any failure to deliver that rate cut by the ECB could prompt a fast and violent GBP decline while action could well propel the pound sterling towards new inter-year highs.