Pound Rises Against Euro and Dollar After Services Sector Bounce Eases Short Term Concerns

Wednesday's services report eases concerns over the short term outlook for the Pound, which had been expected to succumb to bearish short sellers in the event of a poor number.

The Pound rose against the Euro and Dollar Wednesday after the UK services PMI showed Britain’s most important sector of work seeing a pickup in September.

September’s services PMI rose to 53.6, up forty basis points on the previous month and ahead of economist forecasts for a steady reading of 53.2, according to the survey compiler IHS Markit.

“The services sector saw another month of modest growth, running in the middle ground between the robust expansion seen in manufacturing and the contraction recorded in construction,” says Chris Williamson, chief business economist at IHS Markit.

The upturn was driven by consumer activity, itself aided by a healthy labour market. Business to business activity stalled as some companies deferred decisions on large projects due to uncertainty around the progress of Brexit negotiations.

Price pressures continued to build during September, with increasing operating expenses squeezing company margins and feeding the fastest rate of inflation in five months, according to the survey compiler.

“The three PMI surveys put the economy on course for another subdued 0.3% expansion in the third quarter, but the fourth quarter could see even slower growth,” Williamson adds.

The report eases concerns over the short term outlook for the Pound, which had been expected to succumb to bearish short sellers in the event of a poor services number Wednesday.

“With retail sales rising strongly in August and consumer confidence increasing, we may actually see an improvement in the service sector, which would not only stem the slide in GBP/USD but also reverse the rally in EUR/GBP,“ Kathy Lien, managing director of foreign exchange strategy at BK Asset Management, wrote in a note.

Lien had warned earlier that the Pound-to-Dollar rate might fall below 1.3200 in the event of a bad services figure.

A drop off in new work orders combined with uncertainty around Brexit was behind the slump in the construction industry PMI Tuesday, while a modest cooling of the current activity component hit Monday’s manufacturing PMI survey.

The Pound-to-Euro and Pound-to-Dollar rates have fallen sharply throughout the course of the week as a cocktail of concerns over souring economic fundamentals and the possibility of a challenge to Prime Minister Theresa May’s leadership at the ongoing Conservative Party conference jarred the British currency.

“Yesterday’s fall in the construction PMI below 50 was something of a wake-up call and a low services PMI today would question whether the market is right to price in a second 25bp BoE hike by Sep 18 - the first hike now being 80% priced for this Nov,” says Chris Turner, head of foreign exchange strategy at ING Group.

The Pound saw a strong recovery during September after rising inflation pushed a majority of members on the Monetary Policy Committee at the Bank of England to suggest they might begin withdrawing stimulus over the coming months if inflation continues to march northward and the economy remains on a robust footing.

“A few issues have combined to send GBP reeling, but in the first instance, the pound's rapid ascent was about poor positioning rather than any golden opportunity: the market was simply unprepared for the Bank's particularly assertive line,” says Neil Mellor, a senior currency strategist at BNY Mellon.

Since then, markets have begun pricing two full 25 basis point rate hikes over the next twelve months suggesting that, until this week, the most optimistic interest rate scenario was already fully priced in to currencies and bonds.

“Speculative positioning is now neutral and to many, UK economic data have started to make talk of a rate hike incongruous (yesterday's construction figures were abysmal),” adds Mellor.

The Pound extended gains over the Euro and Dollar immediately after the release, with the Pound-to-Euro rate quoted 0.13% higher at 1.1289 and the Pound-to-Dollar rate up 0.22% to 1.3272.