British Pound Roars into Life Against Euro, US Dollar Thanks to Strong German Data

The British pound is seen motoring higher against the US dollar and euro thanks to stronger than expected German confidence data.

The best performing currency against the dollar on Monday the 18th of April was sterling, which extended its gains versus the greenback and at the time of writing on Tuesday has pushed yet higher to be quoted at 1.4323.

The pound to euro exchange rate (GBP/EUR) is meanwhile continuing its recovery from the floor below 1.24, reached in the period 6-11 April.

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In fact, the GBP/EUR has risen on 9 out of the past 10 trading sessions confirming a nascent recovery is looking more plausible with the pair now trading back above 1.26 and looking intent on reaching 1.27.

At the very least recent price action confirms that a floor is set around 1.24, something that chimes with the latest polls of major currency forecasters.

“The resilience of the currency remains impressive considering that Chancellor Osborne talked about the costs of Brexit and house prices rose by roughly the same amount in April as in March,” says Kathy Lien, analyst at BK Asset Management.

There was no domestic catalyst out of the U.K. to drive GBP up over the past 24 hours but as a ‘high beta’ currency it continues to take a cue from risk appetite.

Sterling benefitted significantly from the rally in stocks, continuing to reinforce our observation that a good determinant on sterling performance is Germany’s DAX. 

The main thrust of the morning’s stock market surge came from the Eurozone, the catalyst for this surge being the day’s ZEW economic sentiment figures.

With the German number coming in at 11.2 (against 8.2 expected and 4.3 last month) and the region-wide data at 21.5 (vastly higher than the 13.9 forecast and the 10.6 seen last month) confidence is picking up, despite the very real threat of a Brexit AND a worsening assessment of the German economy.

"This was the green light the DAX needed to roar in to life, jumping by over 200 points to 10350, within a 150 leap away from a fresh 2016 peak," notes Connor Campbell at spread betting providers Spreadex.

Funny how foreign exchange markets work - one would expect strong German data to boost the euro and force the GBP/EUR rate lower. But in this market, the opposite is true.

Technical Outlook

The GBP to USD exchange rate continues to extend higher  through the 1.42/1.4250 pivot region.

“While upper range resistance lies at 1.44/1.45, we see interim channel resistance lying at 1.4360. 1.40-1.3980 is still the main important support region ahead of the 1.3835/1.35 key range lows,” says analyst Robin Wilkin at Lloyds Bank.

Medium-term, Wilkin expects the market to continue to trade a range between 1.3850-1.35 support and 1.45-1.48 resistance.

“Should we see a breakdown through 1.35, then we have little in the way till meaningful support in the 1.2800 region, while a move up through 1.48/1.50 would suggest the 1.40-1.35 support that has held for the last 30-years has again held,” says the analyst.

Concerning the EUR to GBP exchange rate, the cross is putting further pressure on important support in the 0.7925-0.7880 region.     

“A break would support further EUR underperformance and suggest a move back towards the 0.7750-0.7650 lower support zone. Intra-day resistance lies at 0.7995-0.8035. If we hold over support and rally back through there it would suggest the core trend is still in place,” says Wilkin.

The Fundamental Outlook: Carney, Employment and Retail Sales Ahead

This is a big week for the U.K. with employment and retail sales figures scheduled for release.

Employment numbers out on Wednesday are forecast to show the Claimant Count falling by 11.3K people while the Average Earnings + Bonus data is forecast to have risen to 2.3% from 2.1% previously.

On Thursday retail sales are forecast to show a decline of 0.1%, an improvement on the previous month’s decline of 0.4%.

All eyes will be on Bank of England Governor Mark Carney’s appearance before the House of Lords Economic Affairs Committee.

Many topics will be addressed by the Guv but of interest to us will be his comments on the agenda item “when will inflation return to target?” and “to what extent is the historically large current account deficit a concern?”

The meeting starts at 3:35PM today.