As we enter the final trading session of the week the Pound to Euro exchange rate (GBP/EUR) is currently trading close to key support/resistance at 1.2000. Sterling is currently around a cent weaker against the single currency than it was this time last week.
GBP/EUR stuttered last Friday as traders reacted to some soft domestic data for November. Construction Output contracted by -4.0%, whilst both Industrial Production and Manufacturing Production stagnated at 0.0%. All three figures undershot analysts’ expectations, causing Sterling to stutter as investors pared back their forecasts for UK GDP growth in Q4. It is now estimated that the British economy expanded by around 0.8%-0.9% in the final quarter of 2013.
The Pound floundered again on Monday, sinking below 1.2000 for the first time in twelve days as markets sold the UK currency ahead of Tuesday’s crucial Consumer Price Index report.
The CPI inflation print fell by -0.1% to reach a 4-year low of 2.0%, however, GBP/EUR rallied in response to the result because some traders had been positioned for a slightly steeper fall in Consumer Prices. With inflation currently at the Bank of England’s target level, there is less pressure on the Bank to raise interest rates and subsequently demand for the Pound has taken a slight knockback this week.
The Pound to Euro exchange rate remained fairly flat at 1.2030 on Wednesday as German annualised GDP for 2013 underwhelmed at 0.4% and the Eurozone trade surplus widened to €17.1 billion.
Sterling declined mildly against the single currency yesterday, despite data from the currency bloc showing that Consumer Prices fell by one notch to 0.8% during December. The soft inflationary outlook of the Eurozone has caused some analysts to predict that the European Central Bank will be forced to loosen monetary policy again over the next few months. However, with a 25 basis point rate cut in November yet to work its way through the real economy, it is likely that the ECB will remain on the sidelines unless a significant deterioration is witnessed in the Consumer Price Index.
GBP/EUR should manage to close for the week above 1.2000 as long as this morning’s UK Retail Sales print does not throw up any nasty surprises. Sales are expected to have improved by 0.3% during December. With Argos, Dixons and Halfords reporting strong Christmas sales yesterday, it is more likely that Retail Sales will print to the upside than to the downside.
The most important data release to look out for next week is the UK Unemployment Rate print. The joblessness figure is predicted to fall by -0.1% to 7.3%, taking the reading one step closer to the BoE’s 7.0% threshold for considering hiking interest rates. Another strong labour market report has the potential to take GBP/EUR back up to 1.2100.
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