GBP/EUR Eyes 1.42 Next Helped by Services and Construction PMI
- Written by: Gary Howes
The GBP to EUR conversion is pushing new inter-month highs in mid-week trade following the release of a strong Services PMI reading.
The pound begun the week at 1.4006 against the euro and is now seen at 1.4155 - the best exchange rate since August the 19th. 1.42 is the obvious target at this stage, but we expect some paring of gains ahead of Thursday's Bank of England event.
The moves come on the back of strong fundamentals - Markit / CIPS reported that October figures read at 54.9, ahead of the 54.5 expected by traders.
The services sector accounts for upwards of 75% of UK economic activity; it therefore matters for the pound sterling.
24 hours earlier the pound caught a fresh bid above the 1.40 EUR threshold on Construction PMI data that beat expectations.
And, 24 hours prior to that, the release of better-than-expected Manufacturing PMI put a rocket under sterling to ensure November got off to the best possible start.
"The PMI surveys make optimistic reading this month in terms of prospects for the UK economy. The composite indicator sits at 55.4, well above the critical value for growth of 50.0 and over two points up on last month," says Sam Hill, Senior UK Economist at RBC in London.
Must Read: Is the Pound Now Overbought Against the Euro?
Services PMI: Steady
UK service providers reported a slightly faster overall rise in business activity and stronger job creation in October, according to the latest PMI survey data from Markit and CIPS.
That said, the pace of expansion in output was still the secondweakest since May 2013, and new business growth failed to accelerate from September’s 29-month low.
Latest Pound/Euro Exchange Rates
  | Live: 1.1456▲ + 0.11%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1066 - 1.1112 |
**Independent Specialist | 1.1296 - 1.1341 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
While growth in the sector is not proceeding at break-neck pace the important point to note that we have sustainable growth; as long as this observation remains valid we believe the long-term prospects for the UK economy and sterling remain solid.
Construction PMI: Upbeat
The construction PMI read at 58.8, in line with expectations and firmly in expansionary territory. According to Markit, construction companies remain highly upbeat about their prospects for growth over the next 12 months, with more than half (59%) forecasting a rise in business activity and only 7% expecting a decline.
Anecdotal evidence cited an encouraging number of new invitations to tender and expectations of solid spending levels among key clients.
November got off to a cracker for the pound after the release of much better-than-expected Manufacturing PMI numbers.
Sterling popped higher on the results, a sign that currency markets are perhaps becoming more attuned to data releases once more.
All Eyes on the Bank of England
The strong economic performance of the economy will make it ever-harder for the Bank of England to avoid normalising interest rates.
That said, we expect moves in the exchange rate will become more muted as we approach when all eyes will be on the Bank of England who release their latest decision on interest rates, the minutes to their last meeting and their quarterly Inflation Report.
We have coverage of the Bank of England's 'Super Thursday' event here; we note that one of the most likely drivers of the British pound exchange rate complex will be the voting composition of the Monetary Policy Committee (MPC).
The split between 'hawks' who want a higher rate, and 'doves' who want rates unchanged (seemingly forever), will matter.
