Pound euro exchange rates races lower towards key support at 1.2 as markets seek vengeance on the GBP

By Will Peters

The pound euro exchange rate is sharply lower, alongside the rest of the British pound complex, following the release of below-expected Services PMI data.

The first week of February sees markets looking to kill off the pound sterling rally that has thus far characterised 2014, and the PMI data series has obliged by presenting markets with the trigger.

On Monday we got a below expectation (this is important - the data is firmly in growth territory) reading from the Manufacturing sector. The mood of the markets was laid bare when Tuesday's Construction PMI smashed expectations, yet markets merely halted their selling indicating a lack of appetite for GBP no matter the weather.

Today's Services PMI missed expectations, thus allowing the selling to begin in earnest once more.

At 09:41 we see the pound to euro exchange rate (GBP/EUR) trading 0.27 pct lower at 12044; the next obvious target is 1.2. If this is breached then expect a quick run lower as stop losses are triggered.

(NB: All quotes here are taken from the spot market, your bank will affix a spread at their discretion when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering up to 5% more currency for your transfers or international payments. Please learn more here).

We see little that could shift the mood of markets at present and thus expect February to be a challenging month for those holding out for higher pound euro exchange rates.

Expectations towards the UK economy must be re-calibrated; the recovery and outperformance of the economy has impressed and has thus pulled sterling higher. The problem is, expectations have also grown and achieving the element of surprise has become challenging.

So markets will understandably need to recalibrate their expectations, and settle the pound exchange rate complex, through the course of this month.

The Bank of England Quarterly Inflation report next week could however provide an upside surprise if it is shown the Bank is considering interest rate hikes within the next year.

ECB could change sentiment

Further direction in the pound to euro exchange rate will also be provided on Thursday when the ECB announces their February rate and policy decision.

"The ECB is expected to reaffirm its commitment to do whatever it takes to guard the nascent recovery in the euro zone at its interest rate meeting tomorrow. Even if no monetary stimulus is going to be added, the central bank will very probably keep its dovish tone," says Jonathan Sudaria at Capital Spreads.

However, those hoping for the ECB to sink the Euro be wary - Draghi and Co. have proven to be very competent when it comes to keeping market expectations in check.

As such Pound Sterling Live do not expect any major fireworks.

Supporting the euro as of late has been the jitters in emerging markets. Funds have slipped out places like Turkey, South Africa and Brazil to make their way back to the Eurozone.

This has kept a bid under the EUR.

Any signs of stabilisation or a positive turn in sentiment will likely weaken the euro accordingly.