Pound Sterling Outlook: Can GBP to Euro & GBP to Dollar Recover Further as Construction and Services PMI Data Tempts Buyers Back

A strong data release from the Services sector reinforces the technical outlook which remains in positive territory over longer-term timeframes.

However, poor industrial and manufacturing figures will have many second-guessing the willingness of the Bank of England to raise interest rates.

The next hurdle is the Bank of England and European Central Bank decisions. Ahead of the event we see:

• The British pound to euro exchange rate (GBP/EUR) is unchanged on a day-to-day basis at 1.2595.
• The British pound to US dollar rate (GBP/USD) is just 0.07 pct lower at 1.6843.
• The pound to Australian dollar (GBP/AUD) is 0.83 pct lower at 1.8169. The RBA decision has passed without event on Tuesday morning.
• The pound to Canadian dollar (GBP/CAD) is 0.06 pct lower at 1.8500.

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Data update: Service PMI's offers sterling redemption

Sterling pared its recent losses 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.

Right now the most important driver of currency rates are expectations concerning what the world's big central banks will do.

The pound has been enjoying a good run through 2014 because many are betting that the Bank of England will be the first major central bank to raise interest rates - the rise could even come in the first months of 2015.

However, what influences the thinking of the decision makers is the strength of the economy.

The much-watched Markit PMI data  has thus delivered the kind of outperformance needed to reinstall confidence that the  interest rate hikes at the Bank of England are indeed on their way in coming months.

The July UK manufacturing PMI on Friday came in much weaker than expected falling to 55.4, prompting GBP declines. However, both the construction and services sector readings came in ahead of expectations reminding markets of the UK economy's strength.

The Construction PMI that was released on Monday came in ahead of expectations at 62.4, analysts had predicted 62.0.

"Sterling treaded water above mid-June lows against its U.S. counterpart following reassuring news on the nation’s vast services industry which accounts for nearly 80 percent of the economy. Britain’s services PMI jumped to an eight month high of 59.1 in July, well north of forecasts of 57.9 from 57.7 in June," says Joe Manimbo at Western Union.

Positive U.K. data help bring the Bank of England, which meets Thursday, a step closer to raising borrowing rates from crisis lows.

"Many expect the Bank of England (BOE) to lift borrowing rates by early 2015, a hawkish outlook that can help brake sterling’s recent fall from multiyear highs. The current market looks ripe for American importers after the USD was dealt a short-term sentiment blow in last week’s cooler U.S. hiring report," says Manimbo.

Omer Esiner at Commonwealth Foreign Exchange notes: "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."