British Pound, US Dollar and Euro Exchange Rate FORECASTS: PMI's, Bank of England, European Central Bank Set to Dominate Currency Outlook

The US dollar meanwhile continues to enjoy upside momentum and analysts are forecasting further climbs; however we have a busy week ahead and volatility could well spike.

The following foreign exchange levels are noted in the mid-week session:

• The pound to euro exchange rate (GBP/EUR) is 0.09 pct lower on a day-to-day basis at 1.2612.
• The pound to US dollar exchange rate (GBP/USD) is 0.14 pct lower at 1.6863.
• The euro to dollar (EUR/USD) rate is 0.04 pct lower at 1.3371.

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Sterling and dollars up, euro lower

Sterling rallied to trade above a seven-week low after a much stronger than forecast PMI for the nation’s services sector, which makes up roughly 80% of Britain’s economy.

The PMI for services rose to 59.1 in July, its highest level in eight months, which handily beat the forecast for 57.9.

"The data reminded market participants that the U.K. economy continues to outpace the euro zone and U.S. and that the Bank of England will likely lead in eventual monetary tightening. As such, the pound’s pullbacks should remain relatively short-lived," says Omer Esiner at Commonwealth Foreign Exchange.

Euro under-performs

EURUSD was back near November lows after downward revisions to area services data pointed to fresh recovery struggles across the bloc.

"The services PMI got revised lower to 54.2 in July, still growth terrain by keeping above 50, from an initial print of 54.4. The cooler reading followed another wrong step lower in inflation last week to 0.4 percent, a near five-year low, and come ahead of the ECB’s meeting on Thursday," says Joe Manimbo at Western Union.

Tuesday AM: The pound sterling undermined by slowing factory growth

July will not be remembered as the finest for sterling bulls as the 2014 rally ran into trouble.

A notable sell-off in the pound euro rate was note on the first day of the new month when the slowest U.K. factory growth in a year helped reinforce sterling’s southerly move; this reinforced the negative momentum being suffered by the GBP.

The pound dollar rate hit a seven-week low at $1.69 following the news.

"Britain’s manufacturing PMI slipped more than expected to 55.4 in July, a 12-month low, from a downwardly revised 57.2 in June. Sterling’s long, multimonth winning streak has faded given that much bullishness has been well built into its exchange rate," says Joe Manimbo at Western Union.

Meanwhile, a weeks-long stretch of softer data has seen the case weaken for a Bank of England rate hike by the end of the year.

"Still, sterling has a compelling positive tucked away in its back pocket: expectations that the BOE will boost rates ahead of the Fed and other chief peers. Like the ECB, the BOE will next meet on Aug 7, though no changes are anticipated," suggests Manimbo.

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The euro: Fails to fully capitalise on softer USD

The euro saw the losses witnessed through much of July end as we closed out the month.

Gains against the British pound and US dollar in recent sessions could suggest that the euro is bottoming out.

Indeed, we note the shared currency is also looking firm against the commodity dollars including the Aussie, New Zealand and Canadian dollars. Our latest note on the EUR/CAD forecast suggests a rally could even be imminent.

However those hoping for a higher euro would have liked the euro dollar rate to have rallied more following the release of the much watched nonfarm payrolls on the first of the month.

"The US payrolls were slightly softer than expected. Especially average hourly earnings were well below consensus (flat vs 0.2% M/M expected). In a first ‘Pavlov reaction’, yields declined, equities rebounded and the dollar was sold. However, the moves were contained and EUR/USD returned soon to 1.34," says Piet Lammens at KBC Markets.

The outlook for the euro is dominated by the European Central Bank decision due this week. Joe Manimbo at Western Union tells us:

"Front and centre for the euro in the coming week will be an ECB meeting on Aug 7. Euro buyers, keep your ears pricked for any clues that further policy steps may be imminent. A more dovish tone from the ECB would put a heavier weight on the euro and contrast the outlook of increasingly less stimulus from the Fed."

The US dollar slips up but upside momentum forecast to continue

The dollar has been the stand-out currency in global FX over the course of the past month.

The past week, "saw a blowout Q2 GDP report along with the fastest pace of wage growth since 2008, both of which pushed U.S. yields higher and began to put more focus on the timing of the Fed’s first lending rate hike," says Omer Esiner at Commonwealth Foreign Exchange eluding to the two key drivers of USD strength - an outperforming economy and growing interest rate hike expectations.

However, a stumble witnessed on the first day of August could call the USD rally into question for the near-term.

US nonfarm payrolls were forecast to show an increase of 233,000 new jobs last month, a payrolls number at or near consensus would mark the sixth straight month of 200K+ jobs growth for the U.S. economy.

However, the actual number read at 209,000 in July with the unemployment rate little changed at 6.2 percent.

The sell-off was notable with the euro being the main beneficiary in the turn in sentiment.

However, we would expect the sell-off to be a mere blip.

All indications are pointing to this being another month of strong USD performance.