Pound Loses Ground Against Euro as Construction PMI Disappoints

The British pound to euro maintains its trend higher as we move through the first trading week of August despite a slight dip following the release of second-tier data.

Construction PMI comes in below expectations prompting aTuesday sell-off in GBP-EUR. Declines are however forecast to be temporary.

Momentum studies confirm the GBP remains favoured over the EUR with a steady move higher in place since August 2013 - is there any reason to doubt the trend?

We would argue not at this stage; with global interest rate policy divergence being a key driver of exchange rate valuations the Bank of England's desire to raise rates in coming supplies the required fundamental underpinning for the trend.

Ahead of the key Bank of England Quarterly Inflation Report on Thursday the 1.42 area will be seen as support as we doubt traders would look to cut exposure to sterling to such discounted rates.

The preffered bias we hold is for a rally towards 1.44 in coming days with clearer communication from the Bank of England providing the fuel to the GBP/EUR uptrend.

The GBP/EUR is still trading above its 20, 50 and 100 day moving averages while the Relative Strength Index reads at 60 - this level advocates for further gains while being comfortably below over-bought territory at 70.

Those looking to execute a payment in the event of a GBP-EUR rally should inform theire independent FX provider to set buy orders to catch any spikes. At the same time a stop-loss could be set just below 1.42 in the event of Thursday's BoE event torpedoeing the rally. Learn more about ensuring you achieve maximum rates for international transfers.

Construction PMI Disappoints

Sterling is seen coming under selling interest on Tuesday following the release of the July Construction PMI figure.

The release came in at 57.1, analysts had forecast a reading of 58.4.

This is by no means a game-changer for the pound as the construction sector remains firmly in expansionary territory. We will be watching the more important Services PMI on Wednesday for further near-term direction.

Manufacturing PMI Keeps GBP Steady

The British pound moved higher on the global foreign exchange markets following the release of Makit and the CIPS’ Manufacturing PMI. The figure of 51.9 was a beat on market expectations for 51.6 and an improvement on the previous month’s 51.4.

But, there are some points of concern that will keep a lid on the any further gains in the pound sterling.

Ironically it appears that the currency itself is a cause for concern with signs that export orders continue to be weighed down by GBP-EUR.

Commenting on the data Markit and the CIPS say:

“New export orders declined for the fourth straight month in July, mainly as a result of the sterling-euro exchange rate hitting competitiveness in eurozone markets. Levels of new work from overseas were lower in the intermediate and investment goods sectors, but rose solidly at consumer goods producers.”

That said, Rob Dobson, Senior Economist at Markit says the Bank of England will not change course on monetary policy over the data:

“The struggling manufacturing sector, and the impact of the strong pound on export performance, will be a worry for the Bank of England. However, with the goods-producing sector accounting for only one-tenth of the economy, these woes may take second place to the health of the far larger services sector in determining the timing of the first interest rate hike.”

Heading into Thursday’s key Quarterly Inflation Report we note the British pound is maintaining an advantage right across the board in anticipation of confirmation that interest rates will rise around the turn of the year.

Rate Hike in February

The question on that all-importantfirst interest rate rise appears to be split between the November 2015 and February 2016 camps.

Either way Thursday's event at the Bank of England will likely highlight that the economy looks stronger than it did three months ago.

There are probably fewer reasons to think inflation will undershoot the 2% target in the medium term. Indeed, "some" members said in the July minutes that the risk of inflation rising above the target in the medium term had risen. In other words, we do not expect the BoE to push back on the recent upward move in interest rates.

"Our call is for the first 25bp BoE hike in February next year, followed by hikes of the same magnitude in August and November," say Bank of America.

Should the November hike gain traction on Thursday we would expect a sharply higher sterling.

Eurozone Data Continues to Improve

Euro area final manufacturing PMIs were slightly revised up to 52.4 (+0.2 points) from the flash, remaining broadly stable in July confirming. 

The modest upward revision was triggered by output and new orders, while both prices indices were revised down.

Overall euro area manufacturing PMIs stood close to their one year peak, showing some resilience to the Greek crisis and echoing the encouraging signal sent by the European Commission survey, released last week.

Watch this story moving forward, there could well be a time when markets get the story that the Eurozone is recovering and the advantage enjoyed by the UK could be cut ensuring the uptrend in the pound / euro exchange rate is negated.

German factory orders and several Euro Zone industry (PMI) surveys are are likely to show an improving economic growth outlook.

The data could improve Euro sentiment if investors believe the Greek crisis has had a limited negative impact on business activity. Greece’s stock market re-opened yesterday after several weeks closed and suffered severe losses.

The Euro is trading just 1.6 percent above its weakest levels since April against the US dollar.