Summary:
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Services PMI saw a huge decline in November overwhelming a more upbeat tone from manufacturing and construction
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UK economy could see a contraction this quarter
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Pound could become under pressure in the near term
UK services PMI unexpectedly declined in November erasing a positive tone from manufacturing and construction readings and suggesting that the economy could see a contraction in the final three months of the year. The pound was quite stable despite a miss but it remains exposed to a deeper pullback in the nearest future.
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UK services PMI showed business sentiment falling to the lowest since July 2016. Source: Markit, XTB
The most important for the UK economy services PMI slid to 50.4 in November from 52.2 in the prior month and vastly missed the median estimate of 52.5. Due to the high weight of the service sector to the composite PMI we saw its decrease to 50.7 from 52.1 for all upbeat numbers coming from manufacturing and construction. According to Markit the bleak result was due to subdued business and consumer spending being held back by heightened Brexit uncertainty. Business capacity also eased on the back of a lack of new work after some projects were completed. The weaker pace of new orders, softer demand growth as well as rising staff salaries contributed to more cautious hiring policies across the industry last month. Supply-related constraints in the labour market also played a role in weakening employment growth. On the inflation front, November brought a slowdown in input price growth to a six-month low, some respondents cited higher fuel costs and rising staff salaries though. As a result, the rate of prices charged by service providers was the weakest since mid-2017 pointing to lesser domestic inflationary pressures and thereby a reason for the Bank of England to be more cautious in mulling over higher rates. When it comes to the outlook for the next twelve months it eased once again falling to the lowest since July 2016. Based on this release one may forecast the UK GDP rate of growth to fall to 0.1% in the fourth quarter but a lot will depend on a December’s survey. If this month brings a disappointment as well (for example the services PMI falling to below 50 points), it could push the UK economy into a contraction territory.
The pound looks still fragile and it is dancing around its remarkably important support level. The pair has been moving within the bearish channel for most of this year, hence its upper limit along with the 25WMA could provide support for bears. Until the price hovers below these lines, the risks seem to be tilted to the downside with a possibility of a fall even toward 1.21. All hinges on further Brexit developments ahead of the March 2019 deadline. Source: xStation5
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