The British Pound to Euro exchange rate has risen sharply above 1.1700 after Retail Sales in the UK beat expectations in April, surprising many analysts who had forecast the opposite.
Core Retail Sales jumped 2.0% from -1.2% in March and well above the 1.1% forecast.
Headline Retail Sales rose 2.3% from -1.4% in March and also beat consensus estimates of 1.0%.
Both also easily beat estimates on a year-on-year basis with Core up 4.5% and Headline 4.0% compared to April in 2016.
The results capsized fears that consumers were tightening their belts under pressure from rising shop inflation and wage inertia, due to the weak buying power of the Pound.
The Euro meanwhile reversed recent gains on profit-taking despite sentiment improving in a meaningful way for the shared-currency suggesting dips could invite renewed buying of the single currency.
GBP/EUR, which had been falling to the floor of a box-like range it has been oscillating within for months between 1.15 and 1.20, has about turned and started motoring higher after flirting with the 1.1500 range floor.
It could now be starting a new mini-trend higher, back up to the 1.20s, given the significance of today's data.
The pair recently peaked at 1.2000, at the range highs, following a rise in Sterling, due to Theresa May’s decision to call a snap general election in June.
This is expected to lead to her having the wherewithal to negotiate a more economically beneficial middle-ground Brexit, according to the consensus view.
GBP/EUR then fell back down to the 1.16s as a combination of factors supported a recovery in the Euro which began to outperform the Pound.
>> Update: Retail market data showing best international payment rate now at around 1.1600, banks seen offering you a transfer between 1.1287 and 1.1369. More details here.
Mini-Downtrend Still Viable
Despite the pick-up in the Pound to Euro exchange rate seen today we would caution against calling the end of the Pound's decline.
Our technical studies suggest while the longer-term uptrend remains valid the prospect of the recent pullback extending remains possible in the shorter-term.
Technical analysis is the study of price charts and patterns in price, volume and positioning data.
It arguably provides a more objective tool for forecasting and analysing asset prices including foreign exchange rates.
Despite today's boost from Retail Sales the mini-downtrend has still not reversed.
1.1500, at the lower boundary of the multi-month consolidation.
Whilst we are now much more cautiously bearish we still see the possibility of a move down to the bottom of the range at 1.1500.
But a break below the 1.1600 would be required for confirmation of more downside first.
From a technical perspective, the MACD has just broken down below the zero-line in a bearish continuation.
MACD measures momentum and when it corroborates the direction of the price action, as in this case, it supports a continuation of that trend.
Commerzbank’s Karen Jones, in a discussion of the inverse of GBP/EUR, the EUR/GBP pair, sees more upside, which in GBP/EUR translates to more downside, much as out analysis suggests.
AFEX’s Lucy Lillicrap sees the possibility of a breakout in either direction with considerable volatility eventually, with the 1.1500 key lows as a significant watershed.
“As with GBP/USD (and indeed EUR/USD) the current range here can still break in one of two ways going forward with sufficient compression evident to trigger a sizeable relocation regardless,” remarked the AFEX analyst.
“An extension below 1.1550 secondary support looks necessary to encourage an intermediate negative view - targeting 1.1250 thereafter,” she said.
Euro on a Strengthening Path
The election of the moderate centrist Emmanuel Macron in the French presidential elections avoided the potential breakup of the union, concerns about which had been pressuring the Euro lower for months.
Hawkish messages from the European Central Bank (ECB) about the possibility of ending QE early further supported the Euro.
The most significant development on this front comes on Thursday, May 18 from governing board member Benoit Coeure, who raised concerns about the risks of keeping policy too ‘accommodative’ for too long.
In his view keeping interest rates ultra-low – or accommodative in central bank jargon - for too long could lead to a volatile reversion once policies were eventually normalized.
His comments echoed those of several German policymakers who suggested it was high time the ECB began to make policy more ‘normal’.
Recall it was the slashing of interest rates and the cranking up of money printing presses that has pushed kept the Euro under notable pressure over recent years. Should this policy unwind, the prospect for a higher Euro grows significantly.
The ECB had brought in QE after the financial crisis and the Eurozone’s own sovereign credit crisis to help stimulate growth and lending.
A strong trend higher in recent economic data from the region has suggested a more fundamental recovery is in place.
Finally, the Trump-Comey-Flynn scandal, brewing in the US, in which The US President was supposed to have put pressure on the head of the FBI (Comey) to drop an investigation into defence advisor Flynn’s ‘inappropriately’ close relationship with the Russian government, is leading to calls of impeachment of Trump, which could destabilise the global economy.
The Euro is inversely linked to risk appetite, unlike most assets.
This means that during crises the Euro appreciates, so the continued shenanigans in Washington should help it to rise.
This is because of the Eurozone’s ultra-low interest rates, which mean that is gets used as a funding currency by investors seeking to borrow cheaply to invest in riskier emerging market assets.
During a crisis these same investors tend to pull their money out of the riskier (EM maybe) assets and repatriate the Euro’s they borrowed, leading to heightened Euro demand when confidence is low, and thus strength.