Pound Sterling Steady Despite All-Important Services Sector Disappoints in August

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The deterioration of the all-important services sector in August could now mean concerns for the economy become more broad-based.

The British Pound was mixed Tuesday after an influential survey of the all-important services sector disappointed the market, showing a greater deterioration of industry conditions than had been expected by economists.

August’s IHS Markit/CIPS Services PMI came in at 53.2, down from 53.8 in the previous month and less than the 53.5 consensus expectation of economists and economy-watchers.

“A summer slowdown was evident in the economy as the August PMI surveys showed slower rates of expansion in services and construction offsetting an improved performance in the manufacturing sector. The resulting overall expansion was the weakest for six months,” says Chris Williamson, chief business economist at IHS Markit.

The fall was driven by reduced client demand and uncertainty over the outlook for the domestic economy, according to the survey compiler, leading new orders to grow at their slowest pace since the months immediately after the referendum in 2016.

“Robust manufacturing growth means the economy may be rebalancing towards goods production, aided by the weaker pound, but the slowdowns in services and construction send warning signals about the health of the economy,” Williamson added.

Economy Struggling to Find Momentum

"August’s services PMI suggests that the economy is struggling to pick up much pace in the third quarter," says Paul Hollingsworth, a UK economist at Capital Economics.

The services sector is the dominant force in the UK economy and as such, the monthly survey the most important of the three released by IHS at the beginning of each month.

Earlier measures of the construction and manufacturing industries gave off mixed signals about the current health of the UK economy.

On the one hand, manufacturing activity rose to a three year high amid robust domestic and international demand for British goods while, on the other hand, the construction industry barometer extended its nascent slump after a slowdown in business investment led commercial construction activity to slow in the third quarter.

Both manufacturing and construction surveys were forecast to show a mild deterioration in conditions for the month, with construction ultimately surpassing expectations to the downside and manufacturing surprising on the upside.

"Nonetheless, the average level of the all-sector PMI in Q3 so far – which weights together the manufacturing, services and construction surveys – is consistent on the basis of past form with quarterly GDP growth of about 0.4%," Hollingsworth added.

Currency Reaction: Sterling Mixed

The data was not bad enough to push the Pound to Euro exchange rate to fresh lows; the pair has actually risen to 1.0872 as the Euro softend in the wake of somewhat disappointing services PMI data from the Eurozone. Traders are also apprehensive on the shared-currency in then run-up to Thursday's European Central Bank meeting.

The Pound to US Dollar exchange rate gave up earlier gains to trade at a level that was broadly unchanged with the open to the London session, around 1.2924

Sterling weakened relative to the safe haven Japanese yen, dropping 0.29% to 141.48 but gained over the Swiss Franc thanks to a weakening of the Euro, with the pair trading 0.16% higher to 1.2413.

The Pound fell sharply against commodity currencies, with the Pound to Australian Dollar rate dropping 0.305 to 1.6221 and the Pound to New Zealand Dollar rate diving 0.395 to 1.7980. The Pound to Canadian Dollar rate fell 0.15% to 1.6024.

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