Euro Forecasted to Decline as Long-Term Barrier Comes Into View

If you believe the British Pound is undervalued against the Euro, you would not be the only one.

We hear from Leander Dreyer at Jyske Bank reminds us to not forget the long-term picture facing the Euro/Pound exchange rate:

"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."

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Positive data releases should surely support sterling

The positive data Dreyer refers to above continues to flow in.

At 9:30 today the Construction PMI figures smashed analyst expectations.

The purchasing managers’ index for construction, produced by data company Markit and the Chartered Institute for Purchasing Managers rose to a three-year high of 57 in July from 51 the previous month.

Analysts had forecast a mere 51.6.

And today's data follows on from yesterday's Manufacturing PMI which was at 54.6, beating expectations for 52.8.

For the purposes of Euro / Pound exchange rate analysis it would make sense to look over the water and see the Manufacturing PMI's of the Eurozone's two largest economies.

German Manufacturing PMI for July was yesterday revealed at 50.7. France's was at 49.7.

While these were 18 and 17 month highs respectively we can get the sense that the UK recovery is outstripping the Eurozone recovery.

It is however worth remembering that the British pound faces a big event-risk event on the 7th if August in the form of the Bank of England's Quarterly Inflation Report.

Many are expecting Governor Carney to signal attempts at keeping interest rates low and monetary accommodative for the longer term.

This is a GBP negative scenario.

However, any signs that he is taking note of an improving economy and is shifting to a more hawkish stance, will propel GBP/EUR higher