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EUR/GBP Breaks Higher on Strong German Sentiment
Robust sentiment in German and softer than expected UK data has helped the EUR/GBP continue its rebound. The currency pair has broken out of its downtrend on solid momentum and continues to make higher highs.
German Mar Ifo jumped to 107.9 compared to median expectations of 107.3 from 106.8 in the previous month. The higher than expected reading was boosted by a sharp rise in the expectations index, which came in at 103.9, after 102.5 in February. The current conditions indicator improved to 112.0 from 111.3. The diffusion index, which gives the balance of positive and negative answers shows improvements in all sectors, with the exception of the construction industry, where sentiment turned even more negative, despite the sharp rise in house prices.
The March reading meant the Ifo improved to 107.1 in Q1 from 104.5 in Q4 last year. German growth this year is set to come in much stronger than anticipated, and the fact that economic momentum was already strong ahead of the ECB’s QE start means there is some risk of overheating in the German economy. Wages growth is set to pick up and in the long run this will cut German competitiveness and weigh on the medium term outlook and the Bundesbank will need to keep a close eye on the property market.
Not all Eurozone economies are doing as well as Germany, France seems to be mixed. French manufacturing confidence unexpectedly fell to 99 in February, from 100 in March. The reading for the production outlook, however, jumped to 0 from -8 and the overall business confidence indicator improved to 96 from 94. So some signs of improvement, although the data highlights once again that France’s problem never was just a strong EUR, but that there are also deeper structural problems that prevent an improvement in competitiveness and stronger growth.
Tuesday’s UK February CPI data, which came in below expectations at a record low of zero percent, continued a run of bearish-sterling developments, including relatively dovish BoE-speak and unexpectedly soft wage data.
The EUR/GBP pushed higher for a third consecutive trading session and has rallied slightly more than 5% since hitting a low of 0.7015 in mid-March. Momentum is positive with the MACD (moving average convergence divergence) index printing in positive territory with an upward sloping trajectory after generating a buy signal a week ago. Target resistance is seen near 0.7450 and then again at 0.7600.
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