Services PMI Data Surprises to the Upside, Pound Mixed on Friday

The British pound is mixed on Friday as the UK’s all-important service sector continues to grow despite the impending June 23rd EU referendum.

• Capital Economics say economic activity to pick up notably towards year-end
• Barclays targeting 1.40 on GBP vs USD

UK Service PMI data from Markit and the CIPS remains in expansion territory with a reading of 53.5 being released, well ahead of economist forecasts for a reading of 52.5.

The service sector accounts for about 80% of the UK economy and the data will go some way in confirming UK economic growth remains firm, despite fears that the impending EU referendum would impact growth.

The rate of expansion picked up from April’s 38-month low, and expectations for activity over the forthcoming 12 months strengthened.

UK Economy to Find Vigour Over Coming Months

The service PMI data comes on top of the disappointing manufacturing and construction surveys earlier this week and confirms that EU referendum concerns have been intensifying.

28% of survey respondents to the May services survey report that the referendum had had a detrimental impact on their business.

Analyst Ruth Miller at Capital Economics does however caution that we should not only blame the referendum for any downtick in activity as other factors are also likely to have been at play too – with the introduction of the National Living Wage also cited by respondents.

Looking ahead though, there are reasons to be optimistic on the outlook as a bounce-back in retail sales in April and resilient survey measures of investment intentions provide some encouragement that GDP growth won’t slow too abruptly in Q2.

“And once the referendum is out of the way (assuming a vote to “remain”) then we are optimistic that services output will regain some of its vigour in the second half of the year,” says Miller.

British Pound Still Exposed to Downside Risks

The reaction by pound sterling to the data was subdued at best.

We note that the GBP/USD and GBP/EUR remain teetering on key support zones and the sense we get from analysts is that further downside should be expected.

“The GBP has stabilised after losing some 3 cents since Tuesday but the “bounce” has been distinctly muted and short-term price action looks weakish with Cable gains capped around 1.4460/65 overnight,” says Shaun Osborne, a currency strategist with Scotiabank.

“Loss of short-term trend support at 1.4485 (now resistance) and the 40-day MA (1.4454) suggest near-term downside risks towards 1.43.”

Meanwhile, technical strategists at Barclays say deeper declines could be expected. In a recent client note analysts warn that the recent sell-off on increased trading volumes endorses their bearish view on GBP/USD:

“We expect resistance in the 1.4670 area to cap a move towards 1.4330 and then lower towards the 1.4005 area.”

According to Lloyds Bank, a move back through 1.4525/1.4600 would re-open the range highs, but while under this technical point to a deeper test of support in the 1.4270/60 region, with a break there opening the range lows at 1.41-1.40.

“Medium-term we still believe the market should remain in a range between 1.4050/1.3980 (1.35 key below there) and the 1.48-1.4950 region. A move up through 1.50 is needed to suggest the 30-year support in the 1.40-1.35 has again held and technical analysis would look for a gradual move back towards the 1.60/1.65 range over the longer term,” say Lloyds.