EUR/GBP Hits Fresh Trend Low Despite Solid EU Inflation and Confidence Figures

Sterling continues to gain traction make fresh highs against the Euro pushing the EUR/GBP currency pair lower, despite robust Eurozone data this morning and U.K. GDP data showing investment weakness. With the ECB likely to commence its QE in March the EUR/GBP should grind to 0.7000 in time, setting the euro up for further declines while the BoE draws nearer to a tightening, albeit not likely until 2016.

U.K. GDP growth was confirmed at 0.5% quarter over quarter and 2.7% year over year, unchanged from the preliminary reading. The breakdown showed private consumption growth slowing down to 0.5% quarter over quarter, government spending stagnating and investment actually contracting 0.5% quarter over quarter. Especially the latter is disconcerting, as it suggests slowing domestic growth momentum.

Exports meanwhile came in much higher than expected at 3.5% quarter over quarter, which more than outweighed the 1.3% quarter over quarter rise in imports. Total business investment dropped 1.4% quarter over quarter, after already falling -1.2% quarter over quarter. The index of services meanwhile rose 0.6% in the monthly comparison, and 0.8% in the three months comparison.

Inflation was hotter than expected in the EU. Eurozone M3 money supply growth accelerated to 4.1% year over year in January, with December revised up to 3.8% year over year. The three months moving average jumped to 3.6% year over year from 3.1% year over year, still below the ECB’s 4.5% target, but with annual rates moving closer it seems only a matter of time until M3 numbers are back at target, especially as the ECB’s bond purchase program will add further stimulus.

Still, the strong numbers, coupled with the ongoing improvement in confidence indicators raises the question whether QE was really necessary at the current juncture. However, borrowing numbers remain down and lending to non-financial corporations dropped 1.2% year over year in January.

Resistance in EUR/GBP is at 0.7350 and with levels around 0.73145 currently, this level could be tested soon. Momentum remains negative with the MACD (moving average convergence divergence index) printing in negative territory with a downward sloping trajectory.

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