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GBP/USD Underpinned After Strong UK Services PMI Release

GBP/USD Underpinned After Strong UK Services PMI Release

Nick Cawley, Strategist

Talking Points

- December UK Services PMI hits a 17-month high, inflation moves higher.

- UK fourth-quarter GDP seen at 0.5%.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

Another positive Markit PMI report has helped GBPUSD move above the 1.2300 level after the much touted downturn in the UK economy post-Brexit fails to materialize. However the flip-side of a weaker currency are highlighted in prices charged hitting the highest level in over five-and-a-half years. The December services purchasing managers index rose for a third consecutive month to 56.2 from 55.2, the fastest expansion since July 2015, and moved above the 20-year long-run survey average.

Chris Williamson, Chief Business Economist at IHS Markit, wrote: “A buoyant service sector adds to signs that the UK economy continues to defy widely-held expectations of a Brexit-driven slowdown. The faster growth of services activity follows similar news of improvements in the manufacturing and construction sectors at the end of 2016. Collectively, the PMI surveys point to the economy growing by 0.5% in the fourth quarter, with growth accelerating to a 17-month high at the year-end.

The latest survey also pointed to increased cost pressures, due to the post-Brexit weakening of the British Pound. Input prices expanded at a rate close to November’s five-and-a-half year high as fuel, food, IT and wage costs went up.

The latest data will stay the Bank of England’s hand in the short-term, with interest rates unlikely to move any lower as growth remains on a stable footing while inflation ticks up towards the central bank’s target of close to 2%. However with UK Prime Minister Theresa May likely to trigger Article 50 and begin divorce proceedings from the EU by the end of March, growth may slow down while inflation continues to push ahead, leaving BOE governor Mark Carney in a difficult situation.

Chart: GBPUSD 5-Minutes Timeframe (January 05 2017)

GBP/USD Underpinned After Strong UK Services PMI Release

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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