GBP/USD: the service sector is recovering - the pound is strengthening

 
 
 
 
 
 
 

The British pound strengthened at the beginning of today's European session (and the GBP / USD pair moved into positive territory) after falling during the Asian session. After the publication of positive macro statistics reflecting the growth of activity in the UK services sector in May, the GBP / USD jumped 40 pips, reaching 1.4187 (at the time of this article, the GBP / USD pair is traded near 1.4195 mark).

As reported today (at 08:30 GMT) in IHS Markit, activity in the UK services sector in May grew at the fastest in almost 25 years, helped by the growth of income and expenses of companies and households in the context of relaxation of restrictive measures. The purchasing managers' index (PMI) for the country's services sector in May rose to 62.9 (versus a first estimate of 61.8) from 61.0 in April, reaching its highest level since May 1997. A reading above 50 indicates an increase in activity compared to the previous month.

The service sector (its most important part is financial services) employs most of the working-age population in the UK, and it accounts for about 75% of GDP, while the UK's share of global exports of goods and services is 4.5%. Therefore, the restoration of the work of this sector should have the most positive effect on the restoration of the growth of the entire economy of the country.

Against the background of the beginning of the abolition of quarantine restrictions, the volume of new orders in manufacturing and services has grown sharply. In response to this, the growth in selling prices turned out to be a record in the entire history of such statistics, and the rate of creation of new jobs continued to accelerate.

Against the backdrop of the opening of the British economy, economists expect high UK GDP growth in the 2nd quarter of 2021.

Nevertheless, the growth of the GBP / USD above the 1.4200 mark has stalled so far, and the strengthening of the pound has stopped.

Prices in UK stores continued to decline in May, although not as rapidly as in previous months, according to data from Nielsen IQ and the British Retail Consortium (BRC) released on Wednesday.

Economists expect the British pound to weaken if rising UK coronavirus infections postpone the lifting of lockdowns scheduled for June 21, while Brexit remains the larger risk factor for the outlook for the UK economy and the pound. Considering that according to various studies, as a result of Brexit, UK service exports will decrease by more than 100 billion pounds in four years, the British currency should be expected to weaken, economists say.

Meanwhile, the Fed's Beige Book released Wednesday paints an overall optimistic picture of the outlook for the US economy, albeit pointing to supply and price problems.

"The imbalance between supply and demand continues to put pressure on production. In the short term, this limits true economic potential, including labor. However, the further trajectory is still very positive", according to the Beige Book.

The Fed confirmed the acceleration of economic growth across the country, as well as mounting price pressures and problems with attracting workers in some sectors.

Federal Reserve Bank of Philadelphia President Patrick Harker said Tuesday that he is preparing to consider scaling back monetary stimulus measures as the US economy continues to recover from the pandemic-induced downturn. “We plan to keep rates low for a long time, but maybe it's time to at least think about reducing the volume of purchases of government and mortgage bonds”, he said.

The Fed has kept its key rate near zero since March 2020, purchasing at least $ 120 billion in government bonds and mortgage bonds every month since June 2020. In an official statement following the April 27-28 meeting, Fed officials said the economy must "show further significant progress" towards the targets set by the regulator before they consider cutting back on asset purchases.

However, growing fears about the curtailment of the Fed stimulus program amid a strong economic recovery and rising inflation are increasingly making investors doubt the sustainability of the bullish trend in US stock indices and the bearish dollar trend.

Lael Brainard, one of the central bank governors, said on Tuesday that the US Federal Reserve should maintain the same approach to monetary policy in the coming months, however, should be ready to amend it if necessary, "while still closely monitoring changes (in economic data) and staying ready to change (policies) as needed".

Several other Fed officials have also said in the past few weeks that they would like to start discussions on a plan to phase out asset purchases. The next Fed meeting is scheduled for June 15-16, and investors will closely follow it to catch signals from the Fed regarding the possibility of starting to curtail the stimulus to the American economy. If such signals follow, it will lead to the closure of a significant part of the short positions in the dollar and to its strengthening, including in the GBP / USD pair.

Today investors will be watching the publication (at 12:15 GMT) of the labor market report from ADP on the level of employment in the private sector of the US economy. The number of workers in the private sector in the United States is expected to rise by +650,000 in May (after an increase of 742,000 in April, 517,000 in March, 117,000 in February, 174,000 in January, a fall of -123,000 in December). Despite the relative decline, this is a strong indicator that may have a positive effect on the dollar quotes. Recall also that the report released last week on applications for unemployment benefits indicated a decline in the indicator to a new record low (406,000 against the forecast of 425,000 and the previous value of 444,000).

At 14:00 will be published an equally important PMI index of business activity (from ISM) in the services sector of the US economy. In April this indicator came out with a value of 62.7, and in March - 63.7. The forecast for May is 63.0, which should also have a positive effect on the USD.

With regard to the pound, it is also worth paying attention to the speech (at 16:00) of the head of the Bank of England Andrew Bailey. If he gives any comments on the prospects for the monetary policy of the Bank of England, then the volatility in the pound quotes will rise sharply.