British Pound Jumps to 1.18 Against Euro thanks to US Dollar Surge

• Pound to Euro Rate Latest (30-11-16): 1.1801
• Euro to Pound Rate Latest: 0.8475
• Pound to Dollar Rate Latest: 1.2485
• Euro to Dollar Rate Latest: 1.0578

Pound Sterling has jumped into the new month with solid gains against the Euro and a number of other currencies as it surges in lock-step with the US Dollar.

The Pound enters December in a commanding position against the Euro as it continues to feel the benefits of rising UK Gilt yields.

The Pound has moved in tandem with the US Dollar which is up by similar margins against the Euro and other currencies on the back of rising US Treasury yields.

In short, the Trump-trade is still with us.

It was the Trump-trade - the moving higher of rising bond yields in the UK and US in anticipation of a fiscal spending spree by the new President - that has allowed Sterling to enjoy its best months trade against the Euro since 2009 having risen 4.5%.

While UK yields have risen in anticipation of higher inflation and a static Bank of England, the Euro has remained capped as Eurozone yields are kept low by the European Central Bank which continues to hoover up vast amounts of bonds.

This keeps bond prices high but yields low, and it is the yield that arguably matters from a currency perspective.

And this will in all likelihood continue to be the case in 2017 as analysts expect an extension of the ECB's quantitative easing programme to be announced by as early as December, ensuring the currency simply fails to find support from its central bank.

The Euro also suffered as investors focus on a series of looming battles between eurosceptic populists and establishment parties at the European ballot box in 2017.

"Sterling rallied against both the Euro and Dollar in month-end trade. Much of the Pound’s outperformance stemmed from strength against the Euro which spilled over and buoyed GBPUSD. Up 2 percent since Oct. 31, GBPUSD is on track for a winning month as fears of a hard Brexit, while still elevated, have diminished," says Joe Manimbo, a foreign exchange analyst at Western Union Business Solutions.

Latest Pound/Euro Exchange Rates

	Live: 1.1452▲ + 0.08% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1063 - 1.1108
**Independent Specialist	1.1292 - 1.1337 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Bank of England Data Keeps the Momentum Burning

We wrote ahead of the week that we were bullish on the Pound's prospects against the major currencies we track it against.

Our week-ahead forecasts anticipated further gains in the majority of GBP crosses so we were understandably a little nervous when Monday saw the UK currency underperform its peers.

Nevertheless, the underlying positive momentum garnered over recent weeks remains intact and allows the Pound the advantage as we head into December.

Sterling extended gains following the release of some strong money supply data from the Bank of England.

Here are the stats:

• BoE Consumer Credit (Oct) Actual: 1.618B Expected: 1.500B Previous: 1.484B   
• M4 Money Supply (MoM) (Oct) Actual: 1.1% Expected:0.2% Previous: -0.4%   
• Mortgage Approvals (Oct) Actual: 67.52K Expected:65.00K Previous: 63.59K
• Mortgage Lending (Oct) Actual: 3.30B Expected:3.20B Previous: 3.30B   
• Net Lending to Individuals Actual: 4.9B    Expected:4.8B Previous: 4.7B    

“In the next few days, Sterling should in any case be affected less than the Euro by USA data, and respond more to domestic releases. If these are positive, Sterling should strengthen both vs. the dollar and vs. the Euro as this morning’s reaction to very good consumer credit data shows,” says Asmara Jamaleh, Economist at Intesa Sanpaolo.

Sterling has been dictated to by external drivers for much of the past month with the election of Donald Trump to the US Presidency being a particularly, if not surprising, support for the currency.

The promise of a higher growth profile in the United States over coming years has seen US bond yields rise of late which have been matched by corresponding rises in UK yields.

As we note here, there is a good chance that this Trump-inspired foreign exchange landscape will be with us for a while yet.

Pound Still Vulnerable Over Coming Months

Lending is a crucial sign of economic health as this data series is akin to the blood flowing through the economy.

After the 2008 financial crisis all measures dried up overnight and the economy halted and shrunk.

Many analysts forecast that a similar scenario would follow a Brexit vote in June.

They made a fatal mistake - the 2008 crisis and ensuing recession was the result of a structural failure in the economy; a crisis the Brexit vote doesn’t even come close to replicating.

“There were little signs that lending has taken much of a hit from the referendum result. Annual growth in the MPC’s preferred measure of bank lending (M4 lending excluding intermediate OFCs) only dropped a little from 6.4% in September to 6.1% in October,” says Ruth Gregory at Capital Economics.

That said, while Brexit is no fundamental crisis it does have the potential to disrupt growth over coming years by potentially shaking up existing trade arrangements with the European Union.

There is also the question of rising inflation on the back of a weaker exchange rate.

“Looking ahead, the squeeze on real household incomes from rising inflation will probably lead to a slowdown in consumer credit growth. Nonetheless, support from past monetary policy easing should help to limit the extent of this slowdown,” says Gregory.

Unless there is an unexpected piece of bad news on the Brexit front we doubt Sterling will be troubled over coming days, and even weeks.

However, analyst Shaun Osborne at Scotiabank is more cautious:

"We remain GBP-negative and continue to feel that the Brexit process will weigh on the Pound in the future. Eurogroup head Dijsselbloem said Brexit would be a tough ride for the UK."

Could December be the month in which old fears surrounding Brexit return and work against Sterling, or will it be the end of the Trump-trade that will undo Sterling's strength?

We would suspect that December will not offer the same goodwill towards Sterling as November did and would expect the outperformance to fade as much of the oversold conditions in Sterling have now been reversed.