Eurozone PMI Data Aids Pound to Euro Exchange Rate off 8-Month Lows

Pound Sterling is seen advancing against the Euro at the start of the new week following the release of worse-than-forecast Eurozone economic data.

The GBP/EUR exchange rate was quoted at 1.1193 at the time of writing, having been as low as 1.1125 earlier in the day.

The Euro fell back after Eurozone PMI data underwhelmed against analyst expectations and suggest that the Eurozone’s economy might not be growing at the pace required to prompt the European Central Bank into exiting its stimulus programme.

The data suggests the economy might be nearing a peak with manufacturing PMI reading at 56.8, below the 57.2 forecast by analysts.

Services PMI for July read at 55.4, lower than the 55.5 forecast and the composite number read at 55.8, below the 56.2 forecast.

“The reason for the Euro’s (recently rare) showing of weakness was a disappointing set of region-wide PMIs. The services figure remained unchanged at 55.4 after the German and French numbers missed estimates, while the manufacturing reading unexpectedly hit a 3 month low of 56.8,” says Connor Campbell, an analyst with Spreadex.

The Euro has fallen on the data as this serves as a gentle wake-up call to traders that they might have been betting too hard and too fast on a stronger Euro exchange rate.

The pro-Euro stance amongst traders stems from expectations that the ECB is soon to announce how it will end its quantitative easing programme while preparing for further interest rate rises. Traders can now clearly see a future of no ECB stimulus which should allow the currency to rally to fair-value which is much higher than current levels suggest.

Consolidation in the uptrend is however needed and this data appears to be the trigger.

Uptrend Intact

We don’t however expect Sterling to advance too far.

The Pound to Euro exchange rate (GBP/EUR) remains in an extended downtrend signified by a series of lower highs and lower lows being recorded on the daily charts.

At the start of the new week the pair is quoted at 1.1181 on the inter-bank market but so strong is the downtrend that the July 12 lows at 1.1170 were breached last week and the exchange rate has moved down to a new low at 1.1113 established last Friday (July 21):

The last move down was steep and bearish and we see a probable continuation of the bear trend to an eventual target at the significant round-number level of 1.1000.

Such a move, however, would require confirmation from a break below the 1.1113 lows.

The one potential spoiler is the lack of downside momentum in the MACD indicator.

Whilst the exchange rate is making new lows, the MACD is not corroborating these lows, suggesting a lack of selling pressure.

However, this is not a significant enough indication on its own to dissuade us from our central case that the exchange rate will continue to trend lower.

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Data Ahead for the Euro

The main data release for the Euro this week are the just-released PMI data.

PMI’s are surveys which measure activity within a given economic sector.

As detailed above, the numbers disappointed somewhat and serve to suggest that growth in the Eurozone might be stabilising, albeit at high levels.

Apart from PMI data the only other major release is the IFO sentiment gauge for Germany.

The IFO is based on surveys with business professionals.

The gauge measures their view of the current situation as well as their outlook for the medium-term.

It is expected to result in a slight dip in sentiment in July.

This shouldn’t impact adversely on the currency.

Data for the Pound

GDP is expected to continue trundle along at sub-par levels around the 1.5-2.0% mark which we have grown accustomed to in 2017.

The first set of estimates for growth in the second quarter are released on Wednesday July 26 at 9.30 BST, and are likely to be the most significant release for the Pound in the week ahead.

They are currently expected to show a slightly slower 1.7% rise in GDP in Q2 compared to a 2.0% rise at the same time last year (in Q2 in 2016).

Such a result will pull growth down to the lower boundary of the current GDP growth rate range.

Quarter-on-quarter, growth in Q2 is likely to be 0.3% higher than it was in Q1, when it was only 0.2%.

The other release of note is Mortgage Approvals in June, from the British Banking Association (BBA).

These are also out at 9.30 on Wednesday July 23.

Mortgage Approvals have been oscillating in a subdued range for years since the great recession as illustrated in the graph below.

GBPUSDJuly23mortgage

They have, however, formed an interesting triangle pattern over the last few years which provides clues of what might happen next.

Triangles almost always a precursor of periods of high volatility, and although we can’t tell which way the volatility will extend, it is highly probable there will be either a large swift spike higher or lower in the data.

The triangle has probably almost finished as it has formed 5 component waves –  a,b,c,d,e – which is the minimum number to prove completion.

For confirmation, we would be looking for a move above 47,500 in an upside break; or below 37,000 in a downside break.

Using the height of the triangle at its widest as a guide we forecast a post-break volatile spike of about 8,000 -12,000 approvals higher or lower, so assuming the previously mentioned levels are breached, the upside target is 55k level and the downside 30k.

Given housing is such a key leading indicator for the economy this may be a key early warning for the general health of the economy going forward and thus the Pound.

A spike lower in approvals would probably drag down Sterling and vice versa for a spike higher.

 

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