Those looking to buy euros with pound sterling will be doing so from the best levels seen since early February courtesy of a notable leg higher in the exchange rate over the course of the past 24 hours.
Those with imminent euro payments were gifted better exchange rates on the 19th and 20th of May thanks to a massive +1% surge in the GBP to EUR exchange rate.
The gains were prompted by fresh polling data concerning the EU referendum which showed the support for the Remain vote has taken a decisive lead.
Sterling had already been well bid following the release of some better-than-forecast employment and wages data from the UK's official statistics body while the euro exchange rate complex suffered at the hands of inflation data that confirms prices in the Eurozone remain stagnant.
Research by Ipsos MORI for the Evening Standard shows the Remain campaign has pulled ahead to its biggest lead in the past three months — with 55 per cent for staying in and 37 per cent for leaving the EU.
This has served as a trigger to really shake up the GBP market. "Many traders have been short sterling on the premise that the close polls would make pre-referendum trading messy and the widening gap has encouraged aggressive short covering," says Kathy Lien, Director at BK Asset Management in New York.
GBP/EUR Breaks Through a Key Technical Barrier
A much watched technical indicator has been broken on GBP/EUR and delivered a pro-GBP signal that many in the market will take as confirmation that the early-April to mid-May recovery is maturing into something more sustainable.
The 100 day moving average on the pound to euro exchange rate's charts has been breached, suggesting that those betting on a return-to-strength in the euro could be about to be shaken out of the market.
In such an event there is great potential for the GBP to rally higher and seek out fair value - i.e the level it would be trading at were it not for the EU referendum and the distortions to the market it has triggered.
The last time the GBP/EUR broke the 100 day M.A was in October 2015 when the pair rose from 1.3950 through to 1.4250.
This indicates just how powerful technical breaks can be as they reflect shifts in the unseen and all-important structure of the market place.
Note that we have had some false breaks in the past with forays above the 100 day MA in late April proving short-lived.
Could this be the case once again? We await today's close for confirmation that it has actually stuck.
Employment and Wage Data Keep the GBP Bulls Stimulated
The pound has found solid buying interest mid-week on news that UK employment and wage data has beaten analyst forecasts.
Data shows that the claimant count - those unemployed looking for work - actually fell by 2.4K people while analysts were forecasting the rate to rise by 4.3K.
This compares to the previous month’s rise of 14.7K people. “The biggest surprise relative to trends over recent months was the re-acceleration of employment growth, with the level as of the January-March quarter 44k higher than 3 months ago,” say Lloyds Bank’s Commercial Banking unit in response to the data.
Hheadline pay growth unexpectedly picked up, with average weekly pay (including bonuses) rising at a 2.0% annual pace, from 1.9% previously, stronger than the 1.7% expected.
This is where the pound would find any support the data has to offer as increasing wages are likely to stoke inflation over coming months.
Eurozone Inflation Keeps Euro Exchange Rate Under Pressure
While US and UK inflation is running higher, prices in the euro zone today were confirmed below zero.
The dynamic has interest rate futures pointed higher in the UK and US while pointing lower in Europe, injuring the euro’s allure.
"Euro buyers can reap the best prices all month, with EURUSD tipping to three-week lows. The pesky divergence in fundamentals between a weaker Europe and a stronger U.S. is weighing anew on the single currency," says Joe Manimbo at Western Union.
GBP Shakes Aside Inflation Woes
UK inflation data showed price rises are moderating having only risen 0.3% in April. This compares to +0.5% on an annualised basis in the previous month.
Analysts had forecast another reading of +0.5%, strong gains in sterling were capped on the news.
On a monthly basis inflation came out at +0.1% from +0.4% previously, when analysts had forecast a +0.3% result.
Core Inflation also fell to +1.2% from +1.5% previously - also undershooting the +1.3% consensus estimate.
The GBP came off the boil as the data has provided yet another reason for the Bank of England (BoE) to keep UK interest rates unchanged.
BoE Governor Mark Carney will now be obliged to write a letter to the Chancellor of the Exchequer explaining why inflation is more than 1.0% below the BoE's mandated 2.0% target.
The BoE actually revised up their two-year inflation forecast 2 basis points to 2.05% in their May 12 Quarterly Inflation Report, leading some analysts to suggest, the BoE wished to make it clear that they thought markets were being overly pessimistic about inflation in the medium-term.
This actually gave the pound a boost after the release of the report last Thursday, and brought back on the table the debate about the BoE and when they might raise rates.
Breaking Down the Inflation Data
According to the office of National Statistics (ONS), who produced the data, the main contributors to the fall were a drop in airfares, the prices of clothing, vehicles and social housing.
“These downward pressures were partially offset by rising prices for motor fuels and for certain recreational goods and cultural services, and by food prices, which were unchanged between March and April 2016, having fallen between the same two months a year ago.” Continued the ONS Bulletin.
Commenting on the data, Capital Economics’s Ruth Miller dismissed its longer-term impact, putting the miss down to an “erratic Easter effect”, adding:
“..but the big picture is still that price pressures in the economy are still quite weak. Airfares always looked likely to reverse March’s 22.9% monthly rise, given that thiswas largely driven by the timing of Easter – which fell in March this year compared to April in 2015.
The other main driver of the fall in inflation came from clothing prices, which posted a surprising fall of 0.4% on the month and may just reflect the recent poor weather.”
That prices softened despite the offset from higher fuel was a concern, and potentially reflected a broader slow-down in the economy.
Miller went on to highlight how the figures will probably now push well back expectations of the BOE raising rates:
“With increasing signs that the recovery is struggling for momentum, today’s figures may reinforce the markets view that interest rates will stay on hold until 2019 and further fuel talk of an interest rate cut.”
She went on to argue, however, that inflation is unlikely to move, lower, but rather “hover” at the current level before eventually gaining a boost following a win vote for ‘stay’ campaign in the EU referendum on June 23.
“However, we doubt inflation will drop any further towards zero in coming months. Much more likely is that inflation will hover around its current rate and gradually pick up towards 1% by the end of the year as the effects of last year’s falls in food and energy prices drop out of the annual comparison. Our view – if the UK votes to stay in the EU – is still that a rate rise near the turn of the year remains more likely than not, although rates will rise very gradually.”
Producer Prices Show Contrasting ‘Pop’
Producer Prices (PPI) for April, which were released at the same time, actually showed a higher-than-expected rise to 0.4% mom, from 0.3% previously, beating the fall to 0.2% expected.
Year-on-year Producer Prices fell less steeply by -0.7% compared to -0.9% previously.
Core PPI rose 0.2% mom and 0.5% yoy meanwhile.
The rise in PPI, also known as factory gate prices, may have been as a result of base prices for energy and commodities rising on global markets, as well as the lower purchasing power of sterling, which will have impacted on those manufacturers using foreign components.
UK's EU Vote Ahead = Wary of Chasing the Pound Much Higher
Also aiding the GBP higher was an opinion poll in the Daily Telegraph which highlighted that of the polls 800 respondents some 55% favoured remaining in the EU, compared with 40% who would vote to leave.
As we head towards the June 23rd referendum expect such headlines to hold more sway and currency moves to become more erratic.
Indeed, "we would be wary of chasing Sterling higher on the basis of such headlines. If you distil the survey down to those who are certain to vote (there is a far higher number of remain supporters who appear unlikely to vote) the margin is a rather tighter at 51% v 45%. Such a result is close to being within the statistical margin of error and remains virtually unchanged in this poll from their previous one on April 26, when the differentials were 51% vs 46%," pounts out analyst Jeremy Stretch at CIBC in London.
Despite the vagaries of the opinion polls, another polling agency ICM has produced internet and phone polls showing completely conflicting results, the implied odds of a remain vote have extended to stand at around 73%.
While the implied probability of a remain vote appears to be on the rise expect the UK data backdrop to remain challenging.
"Consequently expect this to weigh upon Sterling as the economic surprise index it set to maintain its sharp downward trajectory," says Stretch.