Sterling Falls Against Euro on Poor Data

by on December 21, 2013 3:44 am BST

Sterling falls against the euro for the first time since Wednesday as data out of the United Kingdom showed that the budget deficit widened and consumer confidence falls below expectations, indicating that the economy is still on shaky ground. The pound weakened against peers late in the week, but the currency was still able to gain at least .5 percent against all 16 major peers this month after Bank of England (BoE) Governor Mark Carney said that an appreciating currency could hurt the recovery.

“We’re coming out of the recession with an already very wide deficit,” said Ian Stannard, head of European FX strategy at Morgan Stanley. Stannard sad that if the deficit continues to widen from current levels that the outcome will cause the Sterling to drag. According to the Office of National Statistics, the UK budget deficit widened out to £16.5 billion versus £15.6 billion the year earlier. As traders and analysts become bullish on the UK recovery, the consumer-sentiment index fell from negative 12 to negative 13. Forecasts were predicting a tick upwards to negative 11.

The EURGBP has been in decline since reaching an established supply zone on the daily chart near .8750, and price has been contained by a descending trend line. Price action found support at .8330, while additional support lies at .8300 and .8250. The upside is likely to be contained fundamentally as the UK data has overshadowed the eurozone data, but the pound is looking for a near-term pullback after gaining four percent over the last few months.

The 20 EMA contained further movement upwards at .8380, with the 50, 72, and 200 EMA creating a layered resistance before reaching the descending trend line.

1D Chart of EURGBP

1D Chart of EURGBP

Next week will be thin due to the Christmas year, and liquidity will be low. The US, UK and eurozone will have banking holidays Wednesday and Thursday.