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Eroding Services PMI Stokes Fear of ’Brexit Permeation’ in the U.K. Economy

Eroding Services PMI Stokes Fear of ’Brexit Permeation’ in the U.K. Economy

James Stanley, Senior Strategist

Fundamental Forecast for the Pound: Neutral

Talking Points:

This was a brutal week for the British Pound, as the currency put in five consecutive days of losses against the U.S. Dollar to tally a total move of -2.8% from last Friday’s highs down to this Friday’s low. And while this is becoming somewhat of the norm for the British currency in the post-Brexit environment; in which range-bound market conditions or even potential up-trends end up getting wiped-away by another emergence of sellers, the longer-term range in GBP/USD very much applies; and this will likely make bearish-directional approaches challenging as long as Cable remains above the vaulted psychological level of 1.2000.

The primary source of concern driving price action for the British economy this week was yet another read of slower growth in the services sector; which for the U.K. is a critical segment of the economy. The Markit/CIPS UK Services PMI release earlier on Friday came-in at 53.5, missing the expectation of 54 and below the January read of 54.5. But it’s the bigger trend that’s troubling here; as this data point had posed steady gains in the months following the Brexit referendum – climbing from July into December, and this helped to allay a bit of the fear in the post-Brexit environment about eminent-pain ahead. But January disappointed, and February the same; giving rise to the fear that ‘Brexit risks’ are beginning to further drive within the British economy and are starting to hit the vitally important services sector as slower growth, driven by more cautious risk assumption, continues to take over. If businesses are cautious about the near-term operating environment, and this could certainly be warranted by the political volatility that’s taken place within Parliament after the actual referendum; this could continue to constrain new investment from businesses looking to expand within the British economy.

A continued slowdown in new business growth could, of course, hit inflation: Which would then remove a bit of pressure from the Bank of England to investigate ‘less loose’ policy options in the future; and this less-threatening backdrop of inflationary-build has allowed the currency to drop as higher-rate themes from the United States have gotten further priced-in to Cable.

The week ahead is fairly light with U.K. data, with Friday being the highlight as we receive a batch of medium-importance announcements on industrial and manufacturing production (January figures), trade balance figures (January) and the NIESR GDP estimate for the month of February. The bigger drive to the British currency in the week ahead will likely emanate from foreign themes, such as a European Central Bank meeting on Thursday and U.S. Non-Farm Payrolls on Friday. As Sterling tests historically weak-values on the chart, the litmus for continued losses will likely continue to increase; meaning that data will likely need to print extremely poorly for the longer-term zone of support around the 1.2000 figure to finally give way.

The forecast for the British Pound will be held at Neutral for next week.

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