At the time of writing the Pound to Euro exchange rate trades at 1.1764 - familiar territory for those who have been keeping an eye on this pair over recent days.
Pound Sterling is up 0.34% against the Euro over the course of the past five trading days, despite the declines triggered by the release of underwhelming inflation data on Tuesday, February 16.
GBP/EUR had climbed to new highs of 1.1828 ahead of the release before suffering a slight retracement below 1.18 in the mid-week session.
Despite the retracement lower, the short-term uptrend remains intact our analysis suggests but we need to see a key point of resistance broken before any meaningful gains are delivered.
The 200-day moving average (MA) is not far above at 1.1849, and given moving averages are dynamic levels of support and resistance, if it does reach the MA it will probably be pushed back down as selling interest increases supply at that level.
Nevertheless, the very short-term uptrend is intact and expected to continue and will probably eventually pierce through the 200-day.
A clear break above the 200 MA and the R1 monthly pivot not far above at 1.1889, would be necessary to forecast a continuation higher.
For confirmation, we would be looking for the exchange rate to break above the 1.1950 level with the next target thereafter at 1.2100.
The monthly chart is showing a bearish ‘one step forward two steps back’ setup, which is comprised of a long, green, bullish up month in November 2016 followed by two smaller red down months in December and January.
Such a set-up strongly suggests the current month of February will close higher than it opened, meaning at the very least above 1.1654.
News and Data for Sterling in the Second Half of the Week
The Pound struggled in the mid-week session following the release of worse-than-expected average earnings data which came out at 2.6% instead of the 2.8% expected (and 2.8% previously), in January.
Earnings are indicative of inflation and therefore future monetary policy from the Bank of England (BOE).
A rise in earnings leads to higher inflation which in turn leads to the BOE raising interest rates and this pushes up the Pound because more foreign investors are likely to transfer their capital to the UK to receive the higher interest return being offered there.
Currently the usual relationship between inflation and earnings, however, appears to have broken down, because inflation is being pushed higher, not by more spending, but by the weak Pound and rising global fuel costs.
The slowing wage recovery is weakening the Pound because it could slow economic growth down as people will have less spare cash to spend due to wages not rising as fast as inflation.
“The trouble is inflation is rising at an anti-Goldilocks rate - neither bad enough nor mild enough. It's not fast enough for the Bank of England to hike interest rates, nor slow enough to stop economists fretting about its growth-sapping erosion of consumers’ buying power," says David Lamb, who is head of Dealing at FEXCO.
With average wages now rising only a shade faster than prices, the wheels could fall off the consumer boom that has so far powered the UK economy through much of the post-referendum turbulence.
This feeds into the next major release for the Pound, on Friday, February 17, when Retail Sales for January is published at 09.30 GMT.
Analysts are expecting a slowdown due to wages not rising as quickly as previously and therefore people consuming less.
Of course, the rising cost of imports may also be putting shoppers off due to rising price-tags.
Nevertheless, consensus estimates are for Retail Sales year-on-year (yoy) to show a rise of 3.5%, and 1.0% month-on-month (mom).
Core Retail Sales are forecast to rise by 3.8% yoy and 0.7% mom.
News and Data for the Euro
The Euro has been temporarily thrown a lifeline on Wednesday by data showing a higher-than-expected Eurozone Trade Surplus, which rose to 28bn in January when it had been forecast to fall to 23bn.
However, this comes after some weakness due to the brewing Greek debt crisis.
On Thursday, the minutes from the European Central Bank (ECB) Monetary Policy Meeting in February are published and analysts will be scouring documents for signs the ECB is ready to reduce its accommodative stimulus.
This is probably unlikely given the problems in Greece as well as the potential for a political upset in the Eurozone, with all the elections in 2017 and the rise of support for nationalism.
The overall outlook for the Euro remains biased to the downside, therefore.
“EUR lost ground against several other currencies overnight. The immediate concern is worries about Greek debt restructuring. The medium-term concern is the European elections. Against this background, the ECB won’t be thinking about ending its QE program anytime soon. I think EUR can weaken further,” says FXprimus’s market strategist, Marshall Gittler in a note on Wednesday morning.