The British pound has enjoyed a morning of good fortune all thanks to news that the UK's unemployment picture is improving at a rapid pace and forecasts for the pound suggest further gains lie ahead.
Driving a strong rally in the GBP/EUR on Wednesday was news that unemployment in the U.K. now stands at 7.1% as of November, down from 7.4% in October.
As the commentary in our live coverage notes, the Bank of England is going to have to come up with news ways to justify keeping interest rates low for longer as the 7% threshold at which the Bank will start considering a rise is breached earlier than expected.
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We are now seeing some of the best rates in sterling euro seen since the start of 2013 with markets factoring in a tightening of monetary policy in the UK long before the same is conducted in the Eurozone.
"Clearly the BoE is going to have to adjust its forward guidance now to give the market an idea of when it may increase interest rates since we’re practically at the threshold now. The market is now pricing in the first rate hike in April 2015 following this morning’s data and expectations of a hike next year will continue to make sterling look attractive, particularly against the euro which could still see monetary policy eased due to very low inflation," says Andy Scott at HiFX.
Forecast for pound to euro
The outlook for the GBP/EUR remains firmly in favour of the GBP as indicated by analyst Luc Luyet at MIG Bank (note for the sake of analysis we utilise movements in the EUR/GBP as opposed to GBP/EUR):
"EUR/GBP made new lows yesterday. Monitor the test of the support at 0.8225. The short-term technical configuration is negative as long as prices remain below the hourly resistance at 0.8264 (20/01/2014 high). Another resistance lies at 0.8286 (15/01/2014 low).
"In the longer term, despite the successful test thus far of the support at 0.8523, the underlying trend remains negative. We favour further gradual weakness towards 0.8160 (61.8% retracement of the 2012-2013 rise). Another key support can be found at 0.8082 (01/01/2013 low)."
Euro exchange rates today
The problem for the euro today is that there is little by way of data to rescue it from the clutches of a dominant sterling.
Some attention will however go to the ECB’s MRO and SMP tenders.
Last week banks asked for €94.7B liquidity, €17B less than maturing liquidity operation. Together with banks front-loading on their reserve requirements and in a context of reduced excess liquidity (about €13B), it pressured eonia higher to 0.359% yesterday, well above the 0.25% refi-rate at which banks get unlimited liquidity (if backed by collateral) at the MRO’s tenders.
The ECB clearly signalled that it would act in case of an unwarranted increase of money market rates which could well add downside pressure on the Euro. As mentioned, where the Bank of England is poised to tighten policy the ECB is poised to expand policy which should drive a further wedge between the euro and sterling.
"Of course, one week of higher eonias is not enough to trigger ECB action. Banks have the opportunity to ask more liquidity in today’s MRO, which should push the eonia lower again. Also the front-loading of their reserve requirements may lessen, which could push the excess liquidity again higher. We will also closely follow the SMP tender," says Leander Dreyer at KBC Markets.
Last week, the ECB managed only just to absorb the full amount of its SMP bond portfolio. Banks may be less eager to participate, if eonia is high. At last week’s SMP.
In all, the British pound remains a favourite and we forecast further gains to 1.225.