Trade in the GBP to EUR exchange rate has become detached from economic reality and for that reason we must respect the levels set out on the charts.
The pound to euro exchange rate failed to react to the best manufacturing and industrial rroduction data release since 2012, in fact it actually fell from a peak of 1.2930 just before the release to 1.2780s after, where it is currently languishing.
This confirms the power of the sentiment surrounding the EU refrendum as well as the technical setup of the underlying market place.
With this in mind, we note the GBP to EUR pair had risen back up to the lower boundary of the ascending channel at 1.2840:
This was probably what traders call a 'return move', which is a move following a breakout, which returns back to the level of the break.
This appears to be the case as the pair shurgs off positive data and resumes its downtrend.
It will now probably move towards an eventual target of 1.2500, generated by extrapolating the height of the channel lower, however it will have to break below the 1.2643 lows for confirmation.
Pound is Now Just a Brexometer, Ignores Incredibly Positive Manufacturing Data
Until the referendum has resolved the uncertainty around whether the UK stays or leaves the EU, it seems little in the way of economic data can now impact sterling.
Writing in response to Wednesday surprisingly positive manufacturing and industrial production data, Richard De Meo, Managing Director of FX specialists Foenix Partners, said that the pound was now no longer simply a 'currency' but had also been transformed into a barometer of Brexit risk , or as he put it a "Brexometer":
"With (Brexit) risks looming, the debate around the health of the UK’s economy has been sidelined and economic indicators have typically been represented by tiny blips in movements of a currency that is otherwise occupied with daily fluctuations in referendum polls. This was in evidence again as such strong data proved unable to leave its mark on sterling, otherwise known as Brexometer."
And the data was very strong indeed.
UK April Industrial Production posted a 2.0% rise, when analysts had only expected a 0.0% increase from March's more modest 0.3% rise.
April Manufacturing meanwhile increased by 2.3% versus 0.1% forecast and 0.1% previous.
Lloyds commented that the rise in the sector was spearheaded by rising sales of pharmaceuticals:
"However, with output expanding in 10 of the 13 manufacturing subsectors – attributed to expanding exports for the 8.9% m/m surge on pharmaceutical output – the expansion on the month otherwise does seem broadly based."
Although the data suggested a pick-up in Q2 GDP, it was from such a low 'base' argue Lloyds that it will still fall to the dominant Services sector to do the heavy lifting, which is more likely to be sensitive to "political uncertainty" from Brexit risk.
Euro Holds Towards Top of Recent Ranges Against the Dollar
The European Central Bank kicked off its corporate bond-buying program on Wednesday and investors applauded the move by driving the euro above 1.1400.
"While this reaction may be counterintuitive especially as Eurozone corporate bond yields dropped to its lowest level in more than a year, their aggressive start gave investors hope that this additional stimulus plus the TLTRO program beginning on June 22nd will be effective in stimulating inflation and growth in the economy," says Kathy Lien, an analyst with BK Asset Management.
Area fundamentals, at the margin, also buoyed the euro as gauges of German factory growth fared better than expected while euro zone growth during the first quarter got revised a smidge higher to 0.6 percent.
Until U.S. numbers make a stronger case for the Fed to boost interest rates, EURUSD’s path of least resistance appears higher.
Euro Exchange Rate to Remain Supported as Eurozone Economy Starts to Fire Up
The euro was only marginally lifted on Tuesday despite a slew of positive data, which showed the Eurozone's GDP growth in Q1 was revised up to a final, highly respectable figure of 0.6% (qoq) from a 0.5% second estimate, and a 0.6% preliminary 'flash' estimate.
German Industrial Production provided further good news after also beating expectations by rising 0.8% in May (-1.3% prev, 0.7% exp), on the back of increased automobile manufacturing, as plants started to get through a rising backlog of orders. Overall the data underscored how the country' exports continued to do well.
Even the subdued construction component, which was negative was explained as a due to January and February being so strong they were hard acts to follow - February chalked up 12.2% gain alone.
Spanish Industrial Production rose by 2.7%, also beating analysts estimates of 2.1%, as the country continued to show signs of finally emerging from the wreckage of the financial crisis.
Whilst EUR/USD rose marginally to the day's highs of 1.1380 in reaction to the news, it was a small 16 hundredths of a cent move, which didn't compare to the massive rise following Friday's NFP miss, when the euro rose over a cent versus the greenback.
Nevertheless, the GDP data was especially positive when compared to the original pre-preliminary estimate of 0.3%, and it will reassure investors that the Europan Central Bank's (ECB) recently upwardly revised 2016 GDP growth staff forecasts of 1.6% (1.4% prev) is likely now to be achieved.
On an annualized basis GDP rose 1.7% in Q1 compared to Q1 in 2015, up from 1.5% in the second estimate and the 1.6% for the first estimate.
The rise in GDP came mainly from an increase in private sector spending, household spending and public sector spending.
Surprisingly, a net increase in imports over exports weighed on GDP, despite the euro's continued relatively low exchange rate.
FX Specialists, Foenix Partners' Senior Sales Trader Alex Lydall said the improved figures would take the pressure of Mario Draghi and the ECB, who might have been worried they would have to come up with ever more radical stimulus programmes to promote growth in the area:
"Today’s number does show there is light at the end of the tunnel, albeit a mere glimmer. With deflation still a primary concern for the bloc state, not to mention a potential Brexit in two weeks which could throw a metaphorical ‘spanner’ in the works – Draghi is trying to gather what positives he can, and growth is a big one."
Whilst Q2 data will now be the primary focus, and it is expected to be slower, it will lessen the need for a strong Q2 figure to keep the current gradual growth trajectory on track.