GBP/EUR Exchange Rate Stronger as Services PMI Disappointment is Forgotten

The British pound (GBP) has found strong buying interest against the euro in the mid-week session, just 48 hours after the disappointment of the Services PMI data release sent the exchange rate crashing lower.

The latest leg lower in sterling / euro was prompted by the release of the Markit / CIPS Services PMI reading for September at 53.3. This was down from 55.6 in the previous month while analysts had forecast the index to rise to 56.0.

This clearly represents a big miss for currency traders who had priced the GBP to EUR exchange rate for a better figure.

The service sector accounts for close to 80% of all economic activity in the UK taking covering a wide variety of activities, for example financial services, media, consulting, education and restaurants.

The weakness reported in the services sector of the UK economy is surprising as we had some strong data releases from other key sectors at the start of October with construction and manufacturing providing support for sterling.

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply noted that, "the further  softening of growth in the services sector must now be causing some concern for the sustainability of the recent recovery   in the UK economy.

There was some good news in that employment showed a strong rise and are at the most robust rate since June, though firms also reported an impact on costs with higher wages and concerns about the effects of the Living Wage.

"This reading marks the weakest level since 2013, but it’s important to stress that the series still remains in significant expansion territory, and is consistent with an economy that is growing just slightly slower in the second half of 2015," points out Ned Rumpletin at TD Securities in London.

Latest Pound/Euro Exchange Rates

	Live: 1.146▲ + 0.15% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.107 - 1.1116
**Independent Specialist	1.13 - 1.1345 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The Outlook for the Pound v Euro

Where will the GBP / EUR exchange rate likely trade over the course of the coming week?

From a technical perspective the outlook remains challenging and we prefer to hold a negative bias at the current time.

That said recent price action that has taken the exchange rate to the 1.3550 line is important - should a break above this line hold then the exchange rate could trade higher in its September range.

The well established support zone at 1.3550/1.36 will provided valuable support to the GBP/EUR over many weeks and will now provide resistance to upside moves. 

Note that momentum is negative with the GBP/EUR trading below the 20, 50 and 100 day moving averages.

We look for a break above the 20 day moving average (currently at 1.3618) to be the first signal that sterling is regaining the upside inititative. Until such a time we will hold a short-term bearish bias but are wary that the exchange rate is looking oversold.

From a fundamental perspective there is still reason to be confident that the pound will find some upside traction againt the euro towards year-end.

Note that there is speculation as to whether or not the ECB will result in downside pressur for the euro.

A number of leading institutions are also noting the strength of the UK economy as being a reason why the pound to euro conversion could rally.

TD Securities are actually forecasting a level of 1.50 to be achieved saying:

"Over the medium-term, we are constructive on GBP but a post-Fed lull period suggests that cable price action will be choppy. With the Fed still on hold, we think the MPC will remain patient, leaving GBP vulnerable to positioning risks."

France's BNP Paribas meanwhile confirm they remain buyers of sterling against the euro:

"We see significant scope for further EURGBP downside, and enter a short EURGBP spot position at 0.7395, targeting 0.7000 with a stop-loss of 0.7510."