Pound to Euro Exchange Rate Forecast – Sterling testing the recent lows at 1.19

Written by on February 9th, 2012

Pound Sterling to Euro Foreign Currency Exchange Rate Forecast - Sterling testing the recent lows at 1.19Since posting an 18 month high on January 8th Sterling has spend the last month consolidating within a couple of cents of that high.

Last Week

Last week was relatively uneventful on the data front, with three separate UK surveys delivering mixed results; the Manufacturing and Services sector surveys convincingly beat expectations, printing at 52.1 and 56.0 respectively, while the PMI Construction survey disappointed, registering at a lowly 51.4 (figures above 50 indicate growth). The equivalent Eurozone figure for manufacturing came in at 48.8. German retail sales unexpectedly contracted in December, helping the Pound to climb back above 1.20, and despite some weak data on the UK housing market Sterling ended the week seemingly poised to go higher. When markets became active again on Monday morning we did go higher, briefly touching 1.21 before turning tail and sliding through the course of the week right back to 1.19 where we trade this morning. Sentiment toward the Euro received a boost as forward looking indicators painted an improving outlook. A Eurozone investor confidence survey rebounded strongly in February, with German factory orders also rising more than expected. These were enough to overshadow a very weak German industrial production figure for December. The German balance of trade figures released yesterday showed a €13.9bn surplus for December. This compares to today’s UK figure which showed a deficit of £7.1bn, although this was somewhat better than the £8.6bn expected. Manufacturing and industrial production figures also came in better than expected this morning and Sterling has perked up slightly in the minutes since these releases.

Heads Up

*Denotes the importance of the data item *** being the highest level.

*** The key UK data release this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound. The market sees a good chance of an increase to £325bn.

*** The ECB also announce their latest interest rate decision at 12:45pm Thursday. We expect rates to remain on hold at 1.0%.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

Outlook

Since posting an 18 month high on January 8th Sterling has spend the last month consolidating within a couple of cents of that high. The trend is therefore still in favour of a stronger Pound. However, the 1.1850 – 1.1900 zone had become a key psychological floor during this consolidation phase, so we would become concerned if Sterling fails to find buyers at this level and slips through 1.1850. Buyers of the Euro should keep in touch and be ready to cover any exposure (and lock in the recent gains) on signs of further weakness.

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