UK Services PMI Beat Gives Pound First Tailwind of the New Month

• Pound to Euro Exchange Rate: 1 GBP = 1.1695, up 0.35%
• Pound to Dollar Exchange Rate: 1 GBP = 1.2470, up 0.24%

Foreign exchange markets have bid the Pound higher in response to some better-than-forecast economic news out of the United Kingdom.

IHS Markit and the CIPS report that their Services PMI figure jumped to 55.0 in March when analysts were only expecting a reading of 53.5.

The beat was large enough to convince traders that the UK economy might not slow down as fast as they had been expecting. The Pound fell following the release of the previous month’s reading of 53.3 which disappointed markets and suggested a slowdown was on its way.

"If the combination of resilient economic data and higher prices continue, interest expectations may also start to change, with the market currently only pricing in a 50% probability of rate hike by December 2018,” says Shilen Shah, a bond strategist at Investec Wealth & Investment in London.

Should that probability rise further then expect the Pound to move higher as it tends to track the prospects for UK interest rates.

"Sterling caught its first tailwind of the week against the dollar thanks to data showing the fastest growth in three months for a sector of the U.K. economy that matters most. Services growth unexpectedly accelerated in March which for now helped to allay worries of Brexit putting a brake on the economy," says Joe Manimbo, an analyst with Western Union.

Manimbo does however caution that upside for the Pound could prove limited ahead of more big ticket U.K. numbers in the days ahead on trade, due Friday, and next week when inflation and unemployment print on Tuesday and Wednesday, respectively.

UK Businesses Confident About the Future

Today's report confirmed business activity and incoming new work both rose at the strongest rates so far in 2017 with respondents recording the sharpest overall increase in new business for three months in March.

Survey respondents also remained optimistic about the year-ahead business outlook, with almost half of the survey panel forecasting growth while only one-in-nine expect a fall in activity.

Export demand stemming from the weaker Pound appears to be helping.

"The weak Pound gave reasons to be cheerful for exporters who reported renewed interest from overseas markets, especially clients based in the USA," says Duncan Brock, Director of Customer Relationships at the CIPS.

Ruth Gregory, UK Economist at Capital Economics says the strong export book should continue to provide support to the economy going forward:

"We continue to think that the support provided by the lower Pound and rock-bottom interest rates should prevent growth from slowing too sharply in the quarters ahead. Our forecast is for annual GDP growth of about 2% for the year as a whole."

Sterling's Reaction and Outlook

Sterling has struggled thus far in April as the short-covering squeeze witnessed through March coming to an end.

Construction and Manufacturing PMI data have not helped with both releases underwhelming market expectations.

The relief following the release of the services PMI was palpable with the Pound to Euro exchange rate jumping 0.27% to reach 1.1687 and the Pound to Dollar Exchange Rate hitting 1.2480, up 0.32%.

We hard warned ahead of the release that Sterling was at risk of falling below the key 1.1628 support level were the data to come in below expectation.

As can be seen in the above chart, the Pound continues to remain in a broad-based uptrend despite the softness seen at the start of April.

However, the exchange rate remains contained within the confines of a longer-term range that sees the rate rarely stray above 1.18 for long so we would suggest the Pound's chances of sustained strength remain limited.

Indeed, this prognosis mirrors that held by Crédit Agricole who are forecasting the GBP/EUR to remain within the current range until early 2018.

With regards to GBP/USD, we also note the exchange rate to be stuck within recent ranges:

Analyst David Sneddon at Credit Suisse is anticipating further losses from here:

"GBPUSD has extended its setback this week to remove support at 1.2433. This leaves the immediate risks lower to test a more important price area at 1.2377/60, the low from late March.

"Follow through beneath here should see weakness extend to 1.2324, beneath which can see a deeper fall to the mid-March low at 1.2109."