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GBP/USD Higher on Soft Markit/CIPS Services PMI, ’Brexit’ in Focus

GBP/USD Higher on Soft Markit/CIPS Services PMI, ’Brexit’ in Focus

Oded Shimoni, Junior Currency Analyst

Talking Points:

- UK’s Markit/CIPS Services PMI at 52.3, below the 53.5 expected

- EU referendum has had a profound effect on the sector, Markit says

- British pound traded higher versus other majors after the news hit the wires

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The British Pound traded higher versus other major currencies (at the time this report was written) after today’s Markit/CIPS Services PMI fell in April. The diffusion index, by Markit Economics, printed 52.3 from the prior reading of 53.7. The number was below economists’ expectations of a 52.3 figure.

Markit/CIPS Composite PMI, which is a combined index of both services and manufacturing, decreased to 51.9 from the prior 53.6 print, and was below the expected 53.2 figure, after Tuesday’s Markit Manufacturing PMI came out weak. The data today also follows a fall in Construction PMI yesterday.

A number above 50 points to an expansion, below 50 to a contraction.

In Tuesday’s Manufacturing PMI report, Markit said that there is now greater pressure on the service sector to sustain GDP growth. After today’s report, Markit remarked that the PMI surveys are collectively indicating a nearstalling of economic growth in the UK, down from 0.4% in Q1 to just 0.1% in April.

The report emphasized ‘Brexit’ concerns as a prime factor contributing to the fall in the service sector, saying the looming referendum has had a profound effect, keeping prices relatively stagnant and delaying new orders.

Interestingly, Markit remarked that the low figures are in the territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or through non-standard measures such as QE.

With that being said, the BoE commented in their latest monetary policy decision that 'Brexit' effects are likely to make macroeconomic and financial market indicators harder to interpret over the next few months, which will make the bank more cautious in interpreting data.

After Monday’s manufacturing figures saw a substantial decline in the GBP/USD, with the figure falling below the 50.0 level for the first time since 2013, the market may have anticipated a bigger miss coming into today’s services data release. It seems that the while the figures came below the initial anticipated figures, the market interpreted the data as sufficient to generate a positive response when the news came out, and the British Pound traded higher versus other majors.

The DailyFX Speculative Sentiment Index (SSI) reveals 50.4% of FXCM's GBP/USD traders are long this pair at the time of writing, implying a lack of directional conviction by the retail trading crowd.

You can find more info about the DailyFX SSI indicator here.

GBP/USD 5 Minute Chart: May 5, 2016

--- Written by Oded Shimoni, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.