Sterling / Euro Exchange Rate Shakes off UK Services PMI Disappointment and Rises

The British pound (GBP) has entered the new week on the back-foot against the euro as GBP sentiment is hurt by the release of a below-par economic data release.

Ultimately though, for currency watchers, keeping an eye on the global picture, particularly economic data in the United States, is required to understand what is driving currencies at the present time.

Nevertheless, Markit's all-important Service Sector PMI reading for the month of September read at 58.7. This is well into expansionary territory and confirms the solid pace of growth in the UK economy which will ultimately underpind the GBP going forward.

However, analysts had been predicting a reading of 59.1, and it is this missing of expectations that will keep gains subdued in the near-term.

At the start of the new week the pound to euro exchange rate conversion: 1 GBP = 1.2741.
The euro to pound exchange rate conversion: 1 EUR = 0.7850.

(If you are holding out for a better rate DON'T DELAY. Ensure your independent FX provider has the correct buy order for when your rate is hit and the correct stop-loss order incase the market moves further against you. Find out more here. Also note that an independent provider can deliver up to 5% more FX than your bank by coming in tighter on spreads and getting you closer to the wholesale markets, find out more here)

UK Services PMI: UK Economic Growth On Track

Markit report that growth of the UK’s private service sector economy was sustained during September, underpinned by sharply rising new business volumes.

"Capacity remained under pressure, with backlogs of work continuing to increase, and companies were suitably encouraged to add to their payroll numbers. Confidence in the future also helped to support payroll expansion, with latest data showing business expectations at a three-month high," say Markit.

Expanding payrolls will keep exchange rate markets confident that the Bank of England will cut rates in early 2015 - a pro-GBP outcome.

Euro Being Sold Off

The euro remains under significant pressure at the current time with a host of forecasts warning that more declines are possible.

The European Central Bank has indicated that it is willing to pump more money into the Eurozone economy - the supply of more euros will likely bring the ECB's balances sheet to about roughly 3 trillion EUR - levels last seen in 2012.

This has left the euro looking vulnerable against the pound and especially the US dollar.

Morgan Stanley warn they are targeting EUR/USD to hit 1.24 at year-end and 1.12 by the end of 2015.

Commenting, Morgan Stanley say:  

"EURUSD has formed a sideways correction since the peak of 1.6039 in 2007. It is currently within a downward C wave that began from a peak of 1.3993 earlier this year. This implies that, to complete this C-wave, EURUSD should go below the A-wave bottom at 1.2043. Breaking the 1.2220 area also marks a break out of the lower end of the recent trend channel."

Forecasts for the Week Ahead

Below is the BK Asset Management forecast for the week ahead:

US Non-Farm Payrolls Released

The big release as we head into the weekend is the release of the much-anticipated US Non-Farm Payrolls; the highlight of the month.

The headline figures came in at 248K, markets were only expecting 215K. The US Dollar has predictably rallied on the news.

Dennis de Jong, managing director at UFX.com, comments on better than expected US nonfarm payrolls figures:

“After a disappointing August, this month’s results have shown that investors were certainly right to be optimistic ahead of today’s announcement.

“September’s figures are more than encouraging and, with the labour market recovering and momentum building, expectations of an interest rate hike will grow.”

Week in Review for the British Pound vs the Euro

Charles Purdy at Smart Currency Business runs through the week that was for the pound / euro exchange rate:

"Positive UK economic data has been ignored by investors as we have seen sterling lose ground across the board in the last few days ending the week down against most if not all other major currencies.

"Sterling traded largely sideways on Monday, as a lack of data saw markets remain flat throughout the day. Disappointing inflation from the Eurozone on Tuesday ignited the markets, as sterling rose to a fresh two-year high against the euro. However, optimism over sterling was short lived as sterling fell to a two-week low against the US dollar due to Bank of England (BoE) concerns over poor wage growth.

"Poor manufacturing growth data from the UK prevented sterling from pushing higher on Wednesday, as it closed the day at a similar level to where it started. Robust growth from the construction industry could not prevent sterling from falling steeply against both the euro and US dollar on Thursday.

"Despite the strongest growth data since February, sterling fell against sustained US dollar optimism, and a surprisingly long-term quantitative easing plan put forward by the European Central Bank (ECB). After remaining strong against the euro through much of the week, sterling fell to a two-week low against the single currency."