British GBP/USD + Euro: The Outlook for Next Week
"We would look for GBP/USD gains to run out of momentum ahead of 1.5250/60." - Jeremy Stretch at CIBC.
In this article: Andy Haldane (above) caps the pound's strength.
What to expect from UK inflation and retail sales - the two key data points to watch in coming days.
The pound sterling entered the previous week on the back-foot as significant losses at the start of November made it vulnerable to its rivals, most notably to the USD.
But as the week proceeded sterling has made gains against both the USD and the EUR.
Presently, the GBP/EUR converts to a high of 1.4122. The pound sterling gained against the EUR, thanks to a weakened EUR following European Central Bank’s (ECB) President Mario Draghi dovish comments to European lawmakers.
Consensus that the ECB will expand their quantitative easing (QE) measures is growing among analysts and this remains the central driver to a weaker euro allowing sterling to hit a 3 month high.
Latest Pound/Euro Exchange Rates
  | Live: 1.146▲ + 0.15%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.107 - 1.1116 |
**Independent Specialist | 1.13 - 1.1345 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Hampering the pound is Bank of England (BoE) Chief Economist, said a rate hike remains a long way off.
The BoE’s Chief Economist was quoted as saying,
“Britain does not need an interest rate hike in the near future because wage growth has fizzled and the outlook for the global economy is uncertain” and “the economic aircraft appears to be losing speed on the runway”.
Jeremy Stretch, CIBC analyst observes, “While it seems hard to countenance seeing Haldane voting for a hike in ’16 we remain of the view that the BoE will likely be 3-6 months behind the Fed, albeit we would be unsurprised should Governor Carney also ultimately be outvoted. However, despite such assumptions we would look for GBP/USD gains to run out of momentum ahead of 1.5250/60. Indeed we would look to sell into such levels, looking for a return towards 1.5030.”
Currently, the GBP/USD is trading in the region of 1.5220.
HALO Financial say the exchange rate is at a key level for the exchange rate:
"This is a crucial level for the GBP/USD rate. Having broken below the uptrend earlier in the month, the GBP/USD rate has bounced and is sitting below that same line.
"This is either a point at which we will see the break confirmed, in which case the Pound will fall back again and make new lows or it could be the point at which Sterling breaks back above the resistance line; it becomes support and the next target (short term downtrend) is tested just below $1.54.
"Short term Dollar buyers who are risk averse should be thinking about trading here. Dollar sellers could have stop loss orders around $1.5250 to avoid being hit by a sudden push higher."
The Outlook for Next Week
We have some big data points to be aware of next week.
1. UK October CPI (17 Nov): Inflation appears to increasingly be the number one factor the Bank of England is leaning on to excuse their lack of action on interest rates.
We believe that only once inflation starts turning upwards will the threat of higher rates, and a higher pound sterling, become more real.
UK inflation is expected to remain in negative territory in October, with a second consecutive reading of -0.1% y/y (consensus: -0.1% y/y).
2. UK October Retail Sales (19 Nov): The UK consumer remains the star of the show ensuring the UK economic engine rolls forward.
It is interesting to note that one of the accusations levelled against negative inflation is that people delay spending decisions in anticipation of lower prices in the future.
Retail sales data do not confirm this to be the case, surely the UK consumer knows that this period of low inflation won’t last forever and as such they continue to consume as normal.
September’s retail sales number was boosted significantly by a combination of the inclusion of August’s Bank Holiday in the September sample, coupled with increased activity around the rugby World Cup.
Market consensus is for a decline to -0.4% m/m, so there is space for an upside beat.
