Sterling Gains Ground Versus Euro Following Robust PMI Services Report

The Euro moved lower versus sterling on Tuesday as European traders returned from the long holiday weekend. The stronger than expected UK PMI services report, was a drag on the currency pair while the EU inflation report had little effect.

The UK Markit services PMI much stronger than expected at 58.9 in March, an seven-month high and up from 56.7 previously. The median forecast had been for a more modest rise to 57.0. The survey’s components showed across-the-board strength, with new business and expectations rising strongly, though price pressures remained subdued. Rising consumer activity on the back of improvement in the labor market and the return of rising real wages have been driving the economy.

The composite PMI figure came in at 58.8 from 56.7 previously. Overall, solid data, affirming that economic momentum has fully recovered after Q4’s soft patch. The good news may not be readily translated into sterling and UK assets into the May 7 election, however, as the election brings concerns of a hung parliament outcome that could also see the Scottish Nationalist Party holding the balance of power.

In EU economic news that continues to shows that maybe QE is having a positive effect on prices, Eurozone Feb PPI inflation rose to -2.8% year over year from -3.5% year over year in January, with prices up 0.5% month over month. The first monthly rise since September last year was mainly driven by a 2.0% month over month pick up in energy prices, which also lifted the annual rate. Excluding energy PPI inflation would have fallen to -0.8% year over year from -0.7% year over year in the previous month. Still, the data highlights that deflationary pressures were mainly driven by the drop in oil prices over the past year and that the risk of a real deflationary spiral remains limited.

The Eurozone services PMI was revised marginally down to 54.2 from 54.3 reported initially, which brought the composite down to 54.0 from 54.1 reported with the preliminary number and versus 53.3 in February. German March services PMI revised up marginally to 55.4 from 55.3, which lifted the composite also to 55.4 from 55.3 reported initially and versus 53.8 in the previous month. This is the highest reading since July 2014, with the new orders number jumping to 53.9 from 52 in February and reporting the strongest rate of expansion since May 2014.

The EUR/GBP currency pair seems to have made a top, and sliced through support near the 10-day moving average. Momentum is negative as the short term MACD (moving average convergence divergence) index generated a sell signal. This occurs as the spread (the 5-day moving average minus the 13-day moving average) crosses below the 6-day moving average of the spread.

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