Pound / Dollar Rate Higher, Supported by Services PMI and Wider Dollar Selling

The pound to dollar exchange rate has been in a strong down-trend but the positive services data this morning has somewhat halted the decline, at least temporarily.

Adding to the GBPUSD recovery is the broad-based US dollar selling being witnessed in the wake of the ECB's monthly monetary meeting and decision.

The surprisingly strong result for U.K Services PMI, which rose to 55.9 from 54.9 previously, vaulting clear of expectations of 55.0, helped staunch a haemorrhaging decline in sterling which had taken cable to a 7-month low. 

The leading research firm’s chief economist, said: “A welcome upturn in services sector expansion helped counter slower growth in Manufacturing and Construction in November, suggesting the U.K continues to enjoy the ‘goldilocks’ scenario of solid economic growth with low inflation.”

The GBP to USD conversion had been bowed by data over the previous two days highlighting a slow-down in Manufacturing and Construction activity and continued downward pressure on retail prices.

However, Markit’s Williamson said the overall picture taking into account Services pointed to higher quarterly growth of 0.6% and annual growth of 2.4% for the economy in 2015. This compared favourably with the 0.5% and 2.3% for previous periods:  

“The three UK PMI’s are pointing to 0.6% GDP growth in the fourth quarter, up from 0.5% in the 3 months to September, this puts the economy on course to have grown by 2.4%  in 2015.”

The report highlighted a rise in demand for IT, Computing, Financial, Transport and Communications services, as major catalysts for Service sector strength.

Inflation caged by low input costs and competition

Despite putting a positive spin on the PMI data Williamson was cautious about the impact of growth on inflation and speculation over when the BOE might decide to increase interest rates, arguing a stubbornly low input costs, tough competition and stuttering wage increases were still keeping demand subdued.

The fall in input costs, caused by current rock-bottom commodity prices, had offset any rises in wages caused by company’s pre-empting the introduction of the national minimum wage in April 2016.

“The weak growth in input costs and tough competition meant prices charged for goods and services were unchanged during the month, contrasting with the modest increases seen in previous months.”

In addition, the report cited a worrying decline in Factory Gate prices, the severity of which had not been seen since “August 2009.”

Earnings spurt probably on horizon

In a separate report entitled “Pay growth dips despite tightest job market since 2009,” Williamson outlined the case for a multi-factor conjunction moving into place which could provide the perfect habitat for a wage spurt in the near future:

“We suspect pay growth may accelerate in coming months,” citing a dramatic narrowing of the ratio of applicants to job openings to 2.4 per vacancy from 5.9 four years ago, as one factor potentially forcing a squeeze higher. A low 5.3% unemployment rate and a continued skills shortage were further factors at play.

“The recent slowing of wage growth is particularly surprising given the tightening of the labour market. The pool of available labour has shrunk considerably…Recruitment Consultants report that difficulties finding suitable staff continue to worsen at one of the worst rates seen over the last 18 years.”

Bottom for Cable?

Cable has been in a strong down-trend but the positive services data this morning has somewhat halted the decline, at least temporarily. Not far below the current price level lies the S1 Monthly Pivot, which if touched would be expected to provide robust support. Apart from that the trend remains down, with expectations tilted to further downside.

In the short-term factors affecting the rate are more likely to be U.S-based, with Non-Farm Payrolls data tomorrow likely to produce volatility. An above-expectations increase in payrolls will renew the down-trend as it will strengthen the case for the FOMC making a December rate hike; an undershoot will produce a more sustained recover, started by today’s services bump, in the pair.

Trading levels are problematic given the trend is strongly down and my preference would be to ride it lower, however, the existence of the S1 pivot so nearby heightens the risk of a pull-back beginning and causing a short-covering rally, which would ruin any short-side trade entries around these levels.