British Pound Today: Crucial UK Services Industry PMI Dominates Sterling

Monday’s data comes as markets look to the Bank of England for signs of changes in interest rates, while keeping one eye on Westminster for indications of progress in the latest round of Brexit talks.

The Pound was treading water during early trading in London Monday as markets positioned for the release of the latest IHS Markit services index, the final PMI survey of note for January.

A bellwether for Britain’s largest economic sector, markets will watch the report closely for further signs of a New Year slowdown in the UK economy.

This is after both earlier surveys of the construction and manufacturing industries pointed toward slower activity for the month of January.

Consensus is for the services index to post a modest 10 basis point fall to 54.1, down from 54.2 in the previous month, which would still leave the index close to a one year high.

“Our below-consensus forecast of 53.5 implies some downside risk for Sterling, which would likely come under pressure if the reading falls short of market expectations for an almost unchanged reading of 54.1,” says Kathrin Goretzki, a FX Strategist with UniCredit Bank in London.

Goretzki warns any disappointment in the PMI would likely add to Friday’s drop in GBP/USD and drive the pair closer to 1.40, where the currency should find support. “EUR/GBP would be expected to return to the higher end of the range seen over the past few months and trade closer to 0.89.”

The IHS Markit PMI is a survey that measures changes in business conditions in the services industry from month to month. It asks respondents to rate current conditions across a range of areas including employment, production, new orders, prices, supplier deliveries and inventories.

“While most of the early data was suggesting we could see the services sector run flat, the weak prints on both the manufacturing and construction PMIs last week now points to the Services PMI declining from 54.2 to 53.2, versus a consensus of 54.0,” says Jacqui Douglas, chief European macro strategist at TD Securities.

“The January PMIs so far suggest the adjustment in the housing sector persisted into January while more of the demand was coming from external sources rather than domestic, all suggesting no reason the Services PMI should outperform the softer January data.”

The Pound was quoted a fraction lower against both the Dollar, Euro and much of the G10 basket during early trading Monday, with the Pound-to-Dollar rate marked down 0.10% at 1.4096 and the Pound-to-Euro rate quoted 0.04% lower at 1.1326.

Monday’s data comes at a crucial point for Sterling, as markets look to the Bank of England for signs of changes in monetary policy, while keeping one eye on Westminster for indications of progress in the latest round of Brexit talks.

Both manufacturing and construction industries have already been shown to have slowed during the month of January.

This week, the services data will set the mood toward Sterling as the Bank of England prepares to announce its latest interest rate decision and present the public with an updated set of inflation forecasts.

No change to interest rates is expected Thursday although markets will scrutinise the inflation forecasts closely for clues as to when the Bank might raise rates in the future.

“We expect the BoE to deliver a more hawkish policy signal at this week’s MPC meeting,” says Lee Hardman, a currency analyst at MUFG.

“The probability of a rate hike in May is now seen at close to 50:50. For the pound to strengthen more notably in the near-term, the BoE would have to deliver a clear signal that it is actively considering an earlier rate hike.”

The BoE already hiked the base rate to 0.50% back in November but a resilient performance from the UK economy going into year end, combined with signs that wages and salaries are beginning to rise, has led markets to speculate that another rate hike could come sooner rather than later.

This is, in part, what has helped support the Pound against other currencies over recent months. However, as much as it would have little bearing on the bank’s inflation forecast, a run of soft data in the New Year might be enough to see policymakers sound a cautious tone at this week’s press conference.

Monday’s data also comes closely on the heels of the final instalment of GDP data for 2017, which showed the economy regaining more of its lost momentum during the final months of the year.

Quarterly GDP growth came in at 0.5%, up from 0.4% in the third quarter and the best three monthly performance seen in that year.

As a result, annual GDP growth was 1.8% for 2017 as a whole, just 0.1% below the rate seen in 2016, despite a sharp slowdown that occurred during the first half when quarterly GDP growth slipped to 0.3%.

However, all of that being said, the final quarter of 2016 also saw a very strong GDP number, only for it to be revised down at a later date. GDP data for the first quarter of 2016 was subsequently understated, only for it to be revised upwards at a later date.