UK recovery appears to be losing steam

Euro Highlights

• Sterling Euro - free fall with little respite

• UK recovery appears to be losing steam

Sterling - Euro (GBPEUR) FX Technical Analysis

Sterling Euro spent the most part of the month in a free fall with little respite. This fall has been a continuation of a move that began in December, when fresh stimulus fell short of market projections. A bearish downtrend has emerged, with the Sterling Euro exchange rate dropping by over 10 cents from the highs seen in December, briefly pushing below 1.30. This deterioration in the exchange rate is close to a 100 % retracement of levels that were last observed when the ECB unveiled their plans for a 1.5 trillion Euro bond buying programme back in January 2015.

The Bank of England’s Governor Carney signalled that an increase in the interest rate is still sometime away as he sees global economic risks persisting. Weaker global growth and a continuation of the oil price decline could rattle momentum and restrain inflation further. This downbeat commentary on the outlook for 2016 has seen economists forecasting no change to the interest rate for another year. The focus from Governor Carney has been on external factors however what is becoming clearer is that these factors have already started to take hold.

Britain’s recovery appears to be losing steam, as weak manufacturing and exports persist. Growth in the UK has stabilised but is still very unbalanced. Growth in Q4 was driven entirely by the services industry and there are even warning signs within the sector as the pace of hiring has slowed which can be viewed as managers taking a pessimistic view of economic prospects. Wage growth has continued to slow despite yet another fall in the jobless rate, adding further weight to Mr Carneys’ case that interest rates are unlikely to rise anytime soon. Additionally, mounting investor’s fears over a possible Brexit has seen investors selling Sterling dominated assets – cumulatively this all paints a fairly bleak picture for the Pound.

A failure to close below the 1.30 level showed buying pressure from traders and the sub 1.30 level proved only to be temporary. ECB President Mario Draghi weighed in in a timely manner as he delivered a more-forceful-than-expected statement. He emphasised the bank had plenty of instruments at its disposal to push inflation higher in order to fulfil their mandate. Draghi cited falling oil prices and slowing emerging markets have warranted a review of the current stimulus in March. So far the economist are forecasting another deposit rate cut however they are less certain on what other measures may be unveiled. Could it be a belated increase in the ECBs bond buying programme? What is clear is the Bank of England is not alone in their gloomy outlook in 2016 and the ECB has so far shown that they are much more willing to act.

Euro Buyers

The downtrend still persists, and the current exchange rate has consolidated near the 12 month low. The downtrend is still valid and rate is respecting this trend line. So until we can see a break, sentiment remains bearish. A break of the trend line would also represent a move above the first Fibonacci retracement level which too is acting as resistance. Protection is needed below the previous low of 1.29 and look for an initial target of 1.34 and 1.36.

Euro Sellers

If you haven’t already reduced some of your exposure, then it may be prudent to reduce something near the 12 month lows. With your remaining exposure use the downtrend to your advantage, with a trailing stop loss above 1.32. If the rate continues to move lower adjusting your stop loss lower is advised.