Pound Sterling advanced against rivals such as the U.S. Dollar and Euro mid-week as traders responded to a better-than-expected IHS Markit Services PMI reading, which showed momentum within the UK’s largest economic sector gathering pace in June which makes the likelihood of a Bank of England interest rate rise in August all the more likely.
The IHS Markit services industry PMI rose to 55.1 during the month of June, up from 54.0 previously, when economists had forecast the index to hold steady at 54 following a sharp recovery from earlier lows seen back in May.
UK services companies saw business activity rise at the fastest pace for eight months in June as the effect of earlier snow-related disruption dissipated, giving rise to a flood of new work that saw order books swell at their fastest pace since May 2017, according to IHS Markit.
Business and financial services were the strongest performing sub-sectors.
“June’s Markit/CIPS services survey provides further reassurance that the slowdown in GDP growth in Q1 was temporary and raises the chances that the MPC will vote to hike interest rates in August. The rise in the headline business activity index from 54.0 to 55.1 far exceeded expectations (54.0) and took the balance well above its Q1 average of 53.1,” says Ruth Gregory, an economist at Capital Economics.
Succesful product launches, new marketing campaigns and improving economic conditions in the UK were among the reasons cited by respondents to the survey for the better performance in June.
Furthermore, cost burdens were more pronounced during the recent month, with an increase in energy costs and rising levels of staff pay both squeezing company margins during the period.
“The index now points to quarterly growth in services output of around 0.5%, a welcome improvement on Q1’s 0.3% rate. What’s more, the strengthening of the survey’s forward-looking balances indicate that solid growth in the services sector should be sustained in the coming months,” Gregory adds.
PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.
Markets care about the PMI data because, covering the UK’s three largest commercial sectors, they are an important indicator of momentum within the economy. And economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dicate where interest rates, which are the raison d’être for most moves in exchange rates, will go next.
Wednesday’s result is better than even the most bullish forecasters had anticipated although Pound Sterling’s reaction was mild, likely having been tempered by fresh unease over the trajectory of the Brexit negotiations and stability of Prime Minister Theresa May’s government.
The first-quarter economic slowdown, and a steep decline in UK inflation, led the Bank of England (BoE) to abandon the idea of an interest rate rise in May. This dented the Pound and left markets looking to the August meeting for the next possible move.
“I would have voted to raise Bank Rate at the MPC’s May meeting had data on the economy held firm. What we saw ahead of that meeting was a string of weak data suggesting consumer spending might be faltering,” says Andy Haldane, chief economist at the BoE and a member of the Monetary Policy Committee (MPC), in a speech last week. “I believed there was option value in waiting to see if these data signalled the start of a lasting retrenchment by households, or were instead a temporary snow or statistical blip.”