The British pound to euro exchange rate (GBP/EUR) came under significant pressure following news that the UK’s rate of inflation has hit record lows on Tuesday and Eurozone data beat expectations.
However, on Wednesday some strong labour market data was released resulting in a strong recovery for the sterling-euro pair, taking it back to 8 year highs.
"The British pound was the star of the European session today bursting through the 1.5400 level (against the USD) on the back of much better than expected labor data and relatively hawkish MPC minutes," says Boris Schlossberg at BK Asset Management.
The UK claimant count showed another string decline to -38.6K from -25K eyed while the data for the month prior was revised lower from -29.7K to -35.8K.
The unemployment rate also declined, dropping to 5.7% from 5.8% forecast.
"Average hourly earnings rose 2.1% versus 1.7% expected but ex-bonus the gains were much tamer at 1.7% versus 1.8% expected and were the only disappointing data point in the whole release," says Schlossberg.
Following the release we see the pound to euro exchange rate trading 0.83 pct higher on a day-to-day basis at 1.3567.
The Pound Sterling: Lower on Inflation Data
Sterling is due a correction lower against the single currency after a strong start to 2015.
Triggering the latest bout of selling was new that the UK’s inflation rate fell to 0.3% in January, down from 0.5% a month earlier.
Expectations for deflation over the next few months are high.
In the current environment in which central banks are key to determining currency valuations this inflation reading is important.
The low inflationary environment means the Bank of England can maintain a relaxed approach to interest rates – there is little reason to raise rates in 2015 and markets are currently pricing in the first rate increase for August 2016.
The Bank of England does however forecast inflation to rise from mid-year which should ensure interest rates are ultimately lifted.
Also driving the GBP down against its Eurozone counterpart is the strong bargain hunting by those buyers who think there is little further downside on offer in the near-term.
The Euro: Higher – But Gains Should be Limited
The shared currency spiked higher despite a lack of agreement over how to deal with Greece’s debt.
Buying interest was prompted when the German ZEW rose more than expected on the current situation metric to 45.5 (consensus: 30.0, prior: 22.4).
The ZEW news follows last week’s reports that Germany’s economy is growing at a faster rate than previously thought.
The euro dollar rate trades higher with demand for the US dollar waning.
“The FOMC minutes aside, we still think the broader USD tone here is consolidative; EURUSD remains range bound and still looks a little more likely to move somewhat higher near-term—much as the seasonal patterns suggest it should—even as Greece/EU talks stall and time appears to be running out for a deal,” says Shaun Osborne at TD Securities.
However, the Euro’s strength is not guaranteed to last. In a note to clients Lloyds Bank Research tell us:
“Headlines overnight indicate talks between EU officials and Greece stalled, as both sides failed to back down.
“With discussions still ongoing, EUR remains vulnerable to headlines as we wait for the next Eurogroup meeting, which could be Friday.”
“For EUR/USD the 1.1260/80 area remains good support.”