GBP-USD Exchange Rate Sell-Off Fuelled by Shock Service PMI Result

The pound sterling has fallen against the US dollar and a number of other major currencies after a much-watched service sector data release came in well below expectations.

Markit/CIPS Services PMI read at 56.5, well below the forecast 59.2. This will come as a shock to many currency market watchers who had priced the GBP higher on the basis of a continuation of strength in the UK economy’s most important sector.

In the wake of the data the pound to dollar exchange rate took a dive dropping more than 100 points off session highs to hit a low of 1.5253 before finally finding a modicum of support. Either way, the fall from 2015's best at 1.5815 continues.

Note that these rates refer to the wholesale markets and when you make an international payment / transfer your bank will charge a spread at their discretion. However, using an independent currency provider will get you closer to the real market rate as they apply a smaller spread, in some instances this results in up to 5% more FX being delivered, find out more.

UK Economic Slowdown... Or Over-Reaction?

According to Markit/CIPS today's reading is the weakest of 2015 so far. Chris Williamson, Chief Economist at Markit says:

“Recent weakness in manufacturing and construction has spread to services. Overall growth in May across all three sectors was thelowest since December and the second-weakest for two years.

“The surveys point to GDP growing at a quarterly rate of just  0.4% in May, raising doubts about the ability of the economy to rebound convincingly from the weakness seen at the start of the year."

That said, the reading remains above its longer-term average and there is the chance that activity could pick up over the course of the month owing to the removal of election uncertainty.

"Backlogs continued to rise regardless, as skilled individuals were in strong demand, and as firms increased their marketing and new product activity to meet future needs following optimistic business sentiment," says David Noble at the CIPS suggesting the picture is not as gloomy as currency markets are making out.

UK Construction Sector: Staffing Levels Rise

On Tuesday the British pound found some relief after the Markit/CIPS Construction PMI reading came in at 55.9, ahead of expectations for a reading of 55.0. UK construction companies recorded a slight rebound in output growth during May, but this only partially reversed the loss of momentum seen in April ahead of the general election.

However, we took a major positive from the observation that, “Staffing levels rose at a sharp and accelerated pace in May, with the latest increase in payroll numbers the fastest seen so far in 2015.”

The Bank of England has made rising employment and wages as the single most important condition required ahead of raising interest rates. The British pound remains highly sensitive to expectations pertaining to the first rise, and any suggestions that the employment situation is improving will be taken as sterling-positive.

“Substantial skill shortages in turn led to the third-fastest rise in sub-contractor rates since the survey began in 1997 (exceeded only by those recorded in March and April),” report Markit/CIPS.

This contrasts to the Manufacturing PMI released a day previously that came in below expectations and had an adverse effect on the British pound.

Euro Boosted on ‘Secret’ Meeting

Looking strong on Tuesday the 2nd is the euro. The heads of Germany, France, the ECB and the IMF all attended an emergency meeting in Berlin last night - a development taken by markets that the Greek debt crisis is finally reaching ‘crunch time’ after months of negotiations.

“Consequently the Euro has actually appreciated this morning on bets that Europe will fast-track a deal to stop Greece from defaulting on its debt payments this month, including an IMF payment due June 05. Overnight India slashed interest rates while the Aussie dollar rallied after the RBA made no rate change,” says Nawaz Ali at Western Union.

Any Greek related currency moves should be regarded with suspicion – we have been shown time and time again that any advances on positive developments can be swiftly reversed on the inevitable negative development that usually follows.