UK Markit Services PMI Helps GBP to Rally
UK Services PMI at Multi-Month High as UK Economy Defies Brexit Blues
The UK economy continues to draw strength from its resilient services sector. According to the latest Markit Economics chart, Markit/CIPS services PMI data increased from 47.4 in July to 52.9 in August. Consensus forecasts among analysts and economists were at 50. Among others, services input prices increased the most since 2013 November, while job creation continued and productivity/new business activity showed strong recovery trends.
Markit UK Services PMI is based on the collection of data from a wide range of sources including business services, computing, information technology, restaurants, hotels, communication and financial sectors. Any reading above 50 is deemed growth-oriented while readings beneath 50 are deemed contractionary. The data in August surprised analysts given that the UK is embroiled in a potential economic quagmire vis-a-vis the Brexit. UK business activity offers a mixed set of results with business confidence at -47, manufacturing PMI at 53.30 and services PMI at 52.90.
The Performance of the GBPUSD Currency Pair
UK annual GDP growth for Q2 2016 increased to 2.2%, preceded by a 2% growth in Q1 2016. UK GDP growth is also robust given the Brexit referendum results. On September 30, 2016 the next GDP growth update will be announced and the forecast is 2.2%. All of this data has served the GBP well, despite the pound trading at lower levels lately. In the 24-hour period ending on September 6, 2016 the GBP/USD pair advanced to 1.3298, up 0.08%. However, the sterling continued to track higher against the greenback in the late afternoon and evening session at 1.34350, up 0.92% or 0.0122.
The sterling has been exceptionally bullish of late with a day’s (6 September) trading range of 1.33 on the low end and 1.344 on the high end. The UK Markit/CIPS composite PMI was recorded at 53.6, markedly higher than 50.8 after the manufacturing gains were reported. After the release of market data, the GBP rallied. According to the information, Markit concluded that the UK economy has ‘returned to growth’ and that fears related to the Brexit saga have abated to a degree. Future projections vis-a-vis the UK economy in July were negative, but the business expectations index has recovered since then.
Will the Sterling Rally Through 2016?
Nonetheless, analysts caution against over-optimism. While demand is certainly high for UK exports, this is due solely to the weakness of the GBP. Business confidence remains at its lowest ebb in years. There are some upsides to the weak GBP/USD pair and GBP/EUR pair, notably in the form of travel and tourism. Now that euros and dollars purchase more GBP, incoming tourism in the UK is higher and this bodes well for the industry. The SSI (speculative sentiment index), is also overly bullish on the GBP/USD pair at this time, as all the facts and figures are pointing to a 2016 rally for the sterling.
The recent performance of the sterling is puzzling to currency traders who have taken out net short term positions on the GBP/USD. Speculators are attempting to profit off the sterling’s weakness, but it continues to buck the trend and deliver strong gains. And to prop up the recent rally in the GBP/USD pair is weak economic data emanating from the US. The August NFP data reported gains of just 151,000, with expectations of 180,000. This helped to stall the USD rally and allow the GBP to gain fresh momentum.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.