GBP/EUR, in first release of busy week U.K inflation flat-lines in November
In the first major release of a busy week, U.K inflation shows no change in November, marginally beating expectations, but Sterling remains unchanged as PPI disappoints.
U.K inflation remained unchanged in the month of November according to data out on Tuesday morning.
The data beat expectations of a slight -0.1% drop, although on a year-on-year basis forecasts were met at 0.1%.
Core CPI also came out in line with analysts' estimates, rising 1.2% from a previous 1.1% in 2014.
Some market-watchers had been expecting a lower-than-expected inflation figure due to the negative impact of oil reaching 7-year record lows, however, this was not the case in the headline figures.
Nevertheless, the prices paid at factory gates did decline, more-than-expected, with PPI Output showing a fall of -0.2% from -0.1% expected, and -0.1% previous mom, and -1.5% yoy, from -1.4% previously and -1.3% expected.
PPI Output Core was the same story, with the mom figure declining to -0.2% vs -0.0% expected; and -0.1% yoy from 0.3% previously and 0.1% forecast.
Fed-'up' with surprises?
The next major release is U.S inflation at the start of the U.S session.
This will be of major interest to market participants as it will feed into expectations about whether the Fed will go ahead and hike on Wednesday.
Currently the market is almost complacent about the Fed hiking, however, it’s worth considering the less likely but potentially more volatile outcome – i.e that the Fed decides to delay.
Again, a disappointment is not as small a risk as markets may currently be considering, but it remains an outside possibility based on the recent deep declines in key commodities.
In such a situation the euro would be expected to spike higher.
How is the dollar’s story expected to affect GBP/EUR?
According to analysts at AFEX – who think a bias exists for seeing a rise in the dollar – such an outcome would translate into a similar rise for the pound against the euro:
“Scope nevertheless exists to at least partially retrace the past few weeks sharp sell-off (in the dollar index). On this basis EUR/USD buying interest will probably dissipate ahead of 1.1250 which should at the same time allow GBP/EUR and many GBP crosses to bottom out as well.”
On the other hand, a surprise disappointment from the Fed would be likely to favour the euro versus the pound:
Euro – data to continue improving?
Euro-zone Employment figures come out on Tuesday, along with German ZEW, which is viewed by many in the market as a reliable forward indicator.
Euro-area employment has seen a consistent improvement during 2015, with the Unemployment Rate falling from 10.8% to 10.7% in October.
If the trend continues, this will probably add fuel to the budding rally in many euro pairs, as it will swell the recovery story.
On Wednesday there is Euro-zone Manufacturing and Services PMI, as well as November CPI.
Given many market watchers are upbeat about the euro – which was probably reinforced by today’s Industrial Production data showing a positive 0.6% rise in October from a previous -0.3% result – there is a possibility the currency could gain value over the week, especially if the Fed disappoints, a possibility which may not even come from withholding a rate hike, but simply not being sufficiently hawkish in tone, mirroring the contrary price reaction to recent meetings of the ECB and RBNZ.
Technical Outlook – euro supportive?
GBP/EUR continues to look bearish on a daily chart.
The pair is currently consolidating into ever smaller ranges, forming what could be a pennant continuation pattern, which would indicate more downside to come.
The monthly S2 Monthly Pivot sitting at 1.3730, however, is sitting in the way and likely act an impediment to more bearish activity.
Nevertheless, if the exchange rate manages to break below it (including a margin of confirmation), by moving below 1.3690, it will probably continue down, towards an initial target at 1.3560.
The target calculated at 1.3400, using the pennant, is even more bearish.
