Pound Sterling Holds Advantage v US Dollar, Euro as Services PMI Gives the Feel-Good Factor

Service sector PMI is main highlight for GBP

The British Pound trades above the 1.33 level against the Dollar and 1.19 level against the Euro thanks to a continued run of better-than-anticipated UK economic reports.

  • British Pound to Dollar exchange rate today: 1.3325
  • Pound to Euro exchange rate today: 1.1953
  • Euro to Pound Sterling exchange rate today: 0.8367

GBP continues to outperform its two biggest rivals courtesy of solid UK data and a continued repositioning within the foreign exhange markets that sees traders continue to exit their short-Sterling positions.

Services PMI data from IHS Markit and the CIPS have confirmed the economy's largest sector expanded in the month of August, putting behind it the slump seen following the UK's vote to leave the European Union.

The data read at 52.9, well ahead of economist forecasts and market positioning that expected a reading of 50 to be delivered. This was the strongest rise in over 20 years.

Estimates shown to us by Nordea Markets confirm the UK will avoid recession as the Composite Index (construction + services + manufacturing) now reads at 53.6 for August.

According to analysts, this is consistent with GDP growth at 0.3% quarter-on-quarter for the third quarter.

"The City echoed to the sound of economic forecasts being revised, as the UK’s all-important services PMI came in ahead of expectations, matching the rebound posted by manufacturing last week. The immediate fears of an economic apocalypse have receded, with activity, job growth and confidence all holding up well," says Chris Beauchamp at IG in London.

Business have reported that the uncertainty posed by the EU vote has started to abate with the forward-looking business expectations index recovering most of the ground lost in July:

Markit Services PMI boost pound

"Business optimism ricocheted back to pre-Brexit levels, reassured by market stability and clients bringing dormant projects back to life. Whether this steadiness continues will largely depend on the sector’s reaction to the UK Government’s approach to the Brexit negotiations as the sector keeps one eye on business as usual and one eye on possible obstacles ahead," says David Noble, Group Chief Executive Officer at the CIPS.

It was however also reported that inflationary pressures are rising as a result of the weakened Pound. This is clearly bad for consumer confidence going forward as it suggests shop prices are likely to rise

"While exports will benefit from the weaker GBP, consumer spending is likely to weaken due to the hit to purchasing power from rising inflation and less job security," says Johnny Bo Jakobsen at Nordea Markets in his assessment of the data release.

Even here there are some positives though.

Remember, the Bank of England believes inflation at 2% is healthy for the economy in the long-term and rising prices could see retailers increase orders for locally-produced goods and services.

Therefore, the weaker Pound could also be providing a silver lining here too.

Latest Pound/Euro Exchange Rates

United-Kingdom European-sUnion
Live:

1.188▲ + 0.13%

12 Month Best:

1.3218

*Your Bank's Retail Rate

 

1.1476 - 1.1524

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Encouragingly, job creation has resumed in August having paused in July.

However, Nordea Markets' Jakobsen is cautious on the outlook for jobs despite the findings of the PMI survey:

"While the UK economy has seemingly held up better than expected in the immediate aftermath of the Brexit vote, we continue to believe that economic activity will increasingly be hit by prolonged uncertainty after the vote.

"We continue to expect that unemployment will rise in the coming quarters."

Others are also cautious, including Capital Economics who have tended to be the more optimistic concerning Brexit and the UK economy amongst the analyst community. 

"Just as the July survey probably overstated the economy’s underlying weakness, the August survey probably overstates its subsequent recovery. We think an average of the July and August surveys paints a more accurate picture of the economy post-Brexit. And this is consistent with quarterly GDP growth of close to zero – in line with our forecast for Q3 as a whole," says Scott Bowman, UK Economist with Capital Economics.

Nevertheless, the August PMI data series have been something of a revelation for those watching the post-Brexit vote economy with the return to growth in the manufacturing sector being particularly notable.

British Pound Recovery Could Have Limits

The strength of the recent PMI contrasts notably with the July PMI data which were abysmal.

Pound Sterling has understandably benefited from the positive surprises with the Pound to Euro exchange rate rising from a mid-August low at 1.1648 to the +1.19 levels we see at present.

The Pound to Dollar exchange rate has meanwhile ascended from the 1.2865 low to near 1.33.

However, while some analysts do see a turn-around in GBP's fortunes, others are less assured.

"GBP was buoyed by better than expected UK data of late. Further evidence that the initial Brexit shock is abating could help the currency consolidate some more across G10 FX next week. We believe it is too early to call for a turning point in the GBP outlook, however, and expect the currency to trade back closer to recent lows going into year-end," warn Credit Agricole in a recent FX forecast note to clients.

Indeed, despite some analysts suggesting the UK will avoid recession, others warn that this is by no means a guarantee.

Barclays have confirmed on Monday the 5th that the remain poised for recession:

"Our UK economics team expects a significant UK growth slowdown in 2016 and a mild recession in 2017 as a consequence of the Brexit decision, as uncertainty will remain high until a new agreement is negotiated."

Indeed, we got a flavour for the uncertainties that lie ahead at the G10 summit over the weekend when Japan expressed concern that their major banks and pharma companies may have to relocate to Europe should trade tariffs result from Brexit.

The outgoing US President meanwhile said he stood by his word that the UK would be at the back of the queue when it comes to negotiating a new trade deal.

 

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