Sterling to seek support from UK services PMI as Brexit concerns mount

The UK services PMI – a gauge of service sector activity – will be watched closely by investors on Wednesday at 8:30 GMT to assess the health of the UK economy. The report from IHS Markit/CIPS is expected to show growth in the dominant services sector holding steady in June. However, a solid reading is unlikely to provide much support for the pound, which has slumped to 8-month lows in recent days amid growing doubts about the UK government’s Brexit plans.

After a patchy first quarter and a sharp dip in March, the services PMI rebounded in April and May, recovering to a three-month high of 54.0 in May. The index is forecast to remain at 54.0 in June, which although is slightly below the average seen in 2017, would still point to descent GDP growth of about 0.3-0.4% in the second quarter.

Following last week’s upward revision to first quarter GDP growth from 0.1% to 0.2% quarter-on-quarter, and this week’s better-than-expected manufacturing and construction PMIs for June, another beat in Wednesday’s data could boost the chances of a rate hike by the Bank of England at its August policy meeting.

An upside surprise could help the pound claw above the $1.3230 resistance barrier but would first need a convincing break above the 50% Fibonacci of the upleg from $1.1979 to $1.4376, which stands around the $1.3180 mark. Stronger gains would bring the $1.33 handle back into scope, while higher up, the $1.34 level, where the 50-day moving average is intersecting, could act as the next major hurdle.

A disappointing reading however, could push sterling towards immediate support around $1.31. Breaching this support would clear the way to last Thursday’s near 8-month low of $1.3048 and accelerate the declines. Deeper losses would put the spotlight on the 61.8% Fibonacci around the $1.29 level.

But with Brexit worries once again moving to the forefront, the PMI data may fail to attract the usual amount of attention. While Brexit talks got a small boost last week after Michel Barnier, the EU’s chief negotiator, told reporters that progress had been made, lifting the pound to above $1.32, the big focus now is on a UK cabinet meeting at the end of the week when government ministers will try to agree on a post-Brexit customs solution.

The Prime Minister, Theresa May, is hoping to win the support of her cabinet on a new and third plan on a post-Brexit customs partnership with the EU at a special meeting on Friday. May’s previous two proposals on how trade should flow between the UK and the EU after Brexit were rejected by both the EU and her ministers. But with time fast running out before the UK formally leaves the EU on March 29, 2019, failure for the Brexiteers and the Bremainers within May’s cabinet to reach a consensus would fuel doubts about whether a Brexit deal can be reached on time, raising the prospect of a no-deal Brexit.