British Pound Today: Crucial UK Services Industry Slows at Start of 2018

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Monday’s data comes as markets look to the Bank of England for signs of an interest rate rise while keeping one eye on Westminster for indications of progress in the Brexit talks.

The Pound moved sideways during early trading in London Monday, appearing to shrug off a surprise fall in the latest IHS Markit services index, the final PMI survey of note for January.

Monday's reading of the services index, a bellwether for the health of Britain’s largest economic sector, slumped much further than was forecast by economists.  

January's services PMI fell to 53.0 for the month of January, down from 54.2 in December and far below the consensus estimate of economists for a much more modest decline to 54.1.

The IHS Markit PMI is a survey that measures changes in business conditions in the services industry from month to month. It asks respondents to rate current conditions across a range of areas including employment, production, new orders, prices, supplier deliveries and inventories.

Monday’s fall in the index was primarily the result of a slowdown in the number of new work orders which, marking the slowest increase in services output for 16 months, completes a hat trick of disappointing surveys for the start of 2018.

This comes after both earlier surveys of the construction and manufacturing industries pointed toward slower activity for the month of January.

"This meant that the all-sector PMI dropped from 54.7 to 53.2 and on the basis of past form, points to quarterly GDP growth of about 0.3%, much lower than Q4’s 0.5% outturn," says Paul Hollingsworth, a senior UK economist at Capital Economics.

"However, January’s weak survey may not necessarily be a sign of things to come. After all, the new orders index picked up, from 53.0 to 53.3. And the future activity index rose sharply from 66.5 to 69.2, its highest level since March last year."

On a brighter note, while marking down activity levels for the New Year, companies retained an upbeat outlook for the year ahead.

This was evidenced by continued growth in employment, with companies taking on new employees at their fastest pace for four months, making for 18 months of continuous jobs gains across the services sector.

The Pound was quoted a fraction higher against the Dollar and Euro after the release, but lower against much of the remaining G10 basket.

This saw the Pound-to-Dollar rate marked up 0.11%  at 1.4127 and the Pound-to-Euro rate called 0.04% higher at 1.1338.

"Weekend comments surrounding a possible political coup in the house of commons coupled with a weaker all-important services pmi look to be weighing on GBP this morning," says Neil Jones, head of corporates and financial institutions at Mizuho Bank.

"Interesting to note the S&P is commenting on how a disorderly Brexit would bring downward pressure to UK sovereign rating."

Monday’s data comes at a crucial point for Sterling, as markets look to the Bank of England for signs of changes in monetary policy, while keeping one eye on Westminster for indications of progress in the latest round of Brexit talks.

Both manufacturing and construction industries have already been shown to have slowed during the month of January. 

This week, the services data will set the mood toward Sterling as the Bank of England prepares to announce its latest interest rate decision and present the public with an updated set of inflation forecasts.

No change to interest rates is expected Thursday although markets will scrutinise the inflation forecasts closely for clues as to when the Bank might raise rates in the future.

"We expect the BoE to deliver a more hawkish policy signal at this week’s MPC meeting," says Lee Hardman, a currency analyst at MUFG.

"The probability of a rate hike in May is now seen at close to 50:50. For the pound to strengthen more notably in the near-term, the BoE would have to deliver a clear signal that it is actively considering an earlier rate hike."

The BoE already hiked the base rate to 0.50% back in November but a resilient performance from the UK economy going into year end, combined with signs that wages and salaries are beginning to rise, has led markets to speculate that another rate hike could come sooner rather than later.

This is, in part, what has helped support the Pound against other currencies over recent months. However, as much as it would have little bearing on the bank’s inflation forecast, a run of soft data in the New Year might be enough to see policymakers sound a cautious tone at this week’s press conference.

Monday’s data also comes closely on the heels of the final instalment of GDP data for 2017, which showed the economy regaining more of its lost momentum during the final months of the year.

Quarterly GDP growth came in at 0.5%, up from 0.4% in the third quarter and the best three monthly performance seen in that year.

As a result, annual GDP growth was 1.8% for 2017 as a whole, just 0.1% below the rate seen in 2016, despite a sharp slowdown that occurred during the first half when quarterly GDP growth slipped to 0.3%.

However, all of that being said, the final quarter of 2016 also saw a very strong GDP number, only for it to be revised down at a later date. GDP data for the first quarter of 2016 was subsequently understated, only for it to be revised upwards at a later date.

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