Pound Sterling to Euro Foreign Currency Exchange Rate Forecast – Sterling consolidates recent gains…


By Jon Beddell

Foreign Currency Market Update – GBP / EUR Update

Sterling consolidates recent gains

Sterling managed its third weekly gain in four, trading over half a cent higher by the time markets closed on Friday. The previous week was the only losing week in May, and we only lost a few ticks, so on the whole it’s been a very positive month. The big UK data item was the first revision to Q1 GDP. Growth was confirmed at the 0.5% originally estimated (1.8% annual) which was met with a sense of relief. In the midst of that relief the market even managed to ignore a surprise 7.1% decline in business investment in the first quarter when it had been expecting a 2.4% increase. Somehow Sterling still managed to put in its best performance of the week. The fact that Germany posted a growth figure of 4.9% (annualised) attracted unfavourable comparisons to the somewhat anaemic UK growth rate but didn’t seem to do any lasting harm. Neither did a surprise leap in German retail sales do much for the Euro yesterday. The April figure came in at +3.6% compared to expectations of a 0.1% decline. The Pound hardly blinked and the Euro did not benefit.

Meanwhile, the recent UK inflation reading at 4.5% (5.2% RPI) is continuing to generate background noise with some MPC members making hawkish comments, helping to reaffirm the potential for interest rate hikes at some point if the economy can just hold on to its shallow growth trajectory for a few more months.

There’s a general feeling that while Sterling is hardly doing a jig, the Euro is living under the constant pressure of further sovereign debt headlines. The market appears to be ignoring most of the positive European statistics, leaving Sterling to benefit from the general malaise toward the single currency. In the absence of fresh moves to raise the ECB interest rate there seems to be a window of opportunity for the Pound.

Today’s chart is a weekly time frame showing the market movement since late 2009. Clearly we are in a “ranging” market rather than a trending market. There is no long term direction here but instead we see a general tendency for the market to bounce around between 1.10 and 1.22 for the most part. Four weeks ago we saw a dramatic reversal from the 1.1060 low and have built on that ever since. A further rally toward the 1.22 upper boundary does not look unrealistic from here. While hoping for the best we would become seriously concerned if the market breaks the recently established 1.1060 low.

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