Euro vs Sterling: EUR goes from hero to zero in the space of a week

A look at the foreign exchange markets at 14:25 in London shows the euro to pound sterling exchange rate is 0.17 pct down on last night's closing rate at 0.8457.

The GBP to EUR is thus quoted at 1.1825.

Please note: All FX quotes here are taken from the wholesale markets; be warned that your bank will extract a spread on the rate at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering up to 5% more currency. Please find out more here.

The British pound sterling staged a powerful recovery against the euro through the last half of last week after investors agreed the UK recovery remains superior to that underway in the Eurozone.

Construction drives the pound sterling higher

The veracity of the UK recovery was confirmed this morning with the release of the Markit Construction PMI which read at 59.4; well ahead of market expectations for a rise of 58.9.

All eyes now turn to the Services PMI which are due tomorrow. A beat here would only fuel the decline in the euro sterling exchange rate.

However, a miss to the downside would actually do little to dent confidence in sterling. This is because markets are widely expecting the UK recovery to ease back after a strong summer.

This means any beats to the upside are likely to be the greater surprise and will thus have the most impact on the currency.

Euro weighed by predictions of an ECB refi rate cut

Meanwhile, the euro has essentially gone from 'hero to zero' in the course of  a week.

Falling Eurozone inflation figures have only hastened suggestions that this week we will see the ECB cut the refi rate. This would be a decidedly EUR-negative move.

"Last week’s disappointing CPI print reignited fairly dovish expectations on the ECB, including some talk of a potential refi rate cut as soon as this week," says Shaun Osborne at TD Securities.

Osborne doesn't expect any changes to policy rates or any introduction of new LTROs, but the softer inflation data should give Draghi justification to signal the potential for either next month.

Considering how long the market had become on EUR/USD, that could be enough to drive further long liquidation.