Consensus-Beating Services PMI Data, More Gains Forecasted

Today's moves come courtesy of news showing that the all-important UK Services Sector which gave a reading of 60.2 for July.

"At this level, it is above its pre-crisis average of 56.3," say Lloyds Bank Research who say this is further evidence that the UK recovery is becoming entrenched.

Analysts had set their forecasts for today's release too low, as Craig Erlam at Alpari UK says:

"The UK services PMI is expected to improve again in July, hitting 57.4, up from 56.9 in June. As with the data out of the eurozone, the UK data has been extremely encouraging over the last four or five months. As I’ve pointed out previously though, with the global recovery still very fragile, we shouldn’t get carried away with this, although the signs are positive." As a result of this underestimation GBP has to play catch-up.

Eurozone data, it's good, but not as good as the UK

Of course, when it comes to determining GBP/EUR exchange rates the relative performance of the Eurozone and UK must be considered.

As Erlam notes above, economic data is starting to improve in the EZ.

However, the recovery is certainly not as advances as it is in the UK.

Look at Spain's Services PMI which is still in contraction (anything below 50 suggests a shrinkage); Spanish Services PMI for July came in at 48.5.

Italy's Services PMI is at 48.7, France's at 48.6 and the largest Eurozone Economy, Germany, gave a reading of 51.3.

The composite reading for Manufacturing and Services is at 50.5.

The above data clearly indicates the UK to be outperforming continental rivals.

In addition, Eurostat informed on Monday that year-over-year Eurozone Retail Sales fell 0.9% in June, compared with the 0.3% increase in May and above forecasts of -1.2%.

Euro forecasted to decline against the British pound sterling

The above data contrasts provide a timely backing to the belief held at Jyske Bank that the EUR/GBP is tipped for a period of decline.

Leander Dreyer at Jyske Bank says Sell EUR/GBP on a combination of technicals and fundamentals:

"We recommend SELL EUR/GBP with S/L at 0.8825. Over the past five years, EUR/GBP has remained below the red trend line with five points of support. It will require something extraordinarily for investors to breach the long-term trend.

"The recent positive development in the UK economic indicators supports GBP. The rising interest rates in the US is also a greater advantage for GBP than for EUR." (Be aware that Dreyer has 0.8835 as SL on the chart below).

(click to enlarge)

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